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Abstract:
The Financial Reporting Policy Committee of the Financial Accounting and Reporting Section of the American Accounting Association responded to the SEC's July 13, 2007 proposal to accept financial statements prepared in accordance with International Financial Reporting Standards (IFRS) from foreign-private issuers without reconciliation to U.S. GAAP (the SEC subsequently voted in favor of the proposal on November 15, 2007). Our commentary summarizes and interprets relevant academic research. Our main findings are that material reconciling items exist that are relevant to U.S. investors, there are differences in the implementation of uniform standards and that compliance to IFRS or U.S. GAAP by foreign firms is a concern, foreign firms benefit from greater access to capital by listing in the U.S. and the U.S. requirements do not make the U.S. market less attractive to foreign firms, U.S. investors tend to prefer U.S. GAAP suggesting that elimination of the reconciliation may discourage U.S. investment in foreign firms, and that U.S. GAAP - IFRS harmonization might improve the functioning of the U.S. capital markets. We conclude that eliminating the reconciliation requirement was premature.

International Accounting, US GAAP Reconciliation, Foreign Private Issuers

Abstract:
Incorporating the pricing dynamics of external jet fuel markets, this paper investigates the regulatory impact of Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) 101 on discretionary revenue accrual behavior, profitability and the firm's cost of capital in the airline industry. Prior to SAB 101, we posit that airlines could use GAAP flexibility to manage revenues to compensate for fuel price shocks on profitability and the firm's cost of capital. While the regulatory motivation for SAB 101 was to restrain misleading revenue management, we argue that after SAB 101, the potential for additional SEC scrutiny caused airlines to be more conservative in their air traffic liability-revenue accruals leading to increase in airline firms' costs of capital for the airlines making more conservative accruals. First, we find that prior to SAB 101, the air traffic liability account is significantly inversely related to both airline profitability and fuel prices. We then find that an unexpected change in the air traffic revenue liability account affects unexpected profitability. After SAB 101, the relation between profitability and changes in the air traffic revenue liability changed dramatically even after controlling for work disruptions and other economic factors related to the profitability. At the same time, average airlines' cost of capital as measured by bid-ask spreads increased markedly. This increase in the airlines' cost of capital suggests that the SEC intended revenue regulation guidance that did not change GAAP, did impose capital markets consequences on the airline industry.

SAB 101, revenue accruals, cost of capital, airline industry

Abstract:
Considerable anecdotal evidence suggests that there is a linkage between organizational outsourcing and performance. However, few empirical archival studies of the outsourcing-performance relationship have been conducted. Using an archival approach, this paper evaluates the market and operating performance for a rarely studied stakeholder in the outsourcing agreement: the human resource (HR) service providers. Due to their influence on the most important asset of the firm, human capital, we focus on HR providers performing all aspects of HR services, including HR management, HR technology, regulatory compliance, risk management, and payroll. We base our tests on transaction cost economics theory (Coase 1988; Williamson 1979, 1985) which predicts that the performance of the service provider firms should be influenced by the types of services provided and the risks and costs associated with performing those functions. Both experienced and inexperienced providers undertake HR services that require asset specificity and assume additional risk. We first examine whether the market recognizes and reward the providers' undertaking additional risks. Next, we investigate whether the risks undertaken by experienced and inexperienced service providers impact subsequent performance. Using a performance-matched sample, we examine our performance predictions in three ways: 1) market reaction to human resource contract announcements, 2) long-run market returns subsequent to those announcements, and 3) operating performance before and after those announcements. In examining one of the fastest growing trends in the business world today, namely outsourcing to service providers, we find evidence of positive market reaction to HR service provider contract announcements, and we find some evidence of differential effects on subsequent firm performance. The results of this study may inform management of the possible benefits of releasing outsourcing contract award information and also inform stakeholders of the possible economic benefits of HR contracting on the performance of service providers.

Market Performance, Outsourcing, Providers

Abstract:
According to government statistics, at the end of June 2006, there was over $7 trillion of corporate, state, and local government, asset-backed structured finance bonds outstanding with much of it rated by only a (literal) handful of bond rating companies that establish creditworthiness of corporate entities and of governmental units. Linking bond ratings to performance is important particularly in a governmental setting where credit ratings remain a key feature of municipal debt management, and debt is the key source of capital. Yet we know little about the direct linkage between budgetary control and ultimate bond ratings in this setting. In this study, we examine whether budgetary control is associated with performance, using a sample of large U.S. cities over the 2003-04 timeframe. Subject to the same general legal and regulatory constraints, these cities exhibit tight budgetary control at the organizational level, in large part due to the balanced budget requirements. Within this unique context, we examine whether tightness of budgetary controls or effective level of budgetary control within the cities, as measured by budget variances, contribute to performance, as measured by bond rating. We find that the effective level of budgetary control is significantly and positively related to bond rating, refuting a common, but unfounded, assumption that tight budgetary control is the most effective level of budgetary control. This suggests that city mangers interested in maintaining or improving their municipal bond ratings to manage debt costs may consider paying closer attention to the effective level of budgetary control within the cities, as measured by budget variances.

Budgetary Control, Bond Ratings, Public Sector

Abstract:
Over the period 1993-2001, this study examines whether the disclosure practices in the Management's Discussion and Analysis (MD&A) section and Part I of the annual report for 71 firms in four diverse industries (banking, airlines, pharmaceuticals and electronics manufacturing) are differentially associated with the firm's future operating performance and valuation. Supplemental to the financial statements, the Securities and Exchange Commission (SEC) asserts that MD&A disclosures should provide investors and other users with transparent information on the financial condition and results of operations of the registrant, with particular emphasis on the registrant's prospects for the future. Our study addresses this issue. We find that our disclosure index based on comprehensive content analysis provides incremental explanatory power in predicting future firm performance and market valuation while controlling for current income and other related factors. While previous studies have not considered differential industry analyses, our results vary by the nature of the industry, particularly when future performance is more closely related to nonfinancial performance measures that are generally not disclosed or not clearly disclosed in current MD&A and Part I of the annual report information. This suggests that the SEC's current concern for more meaningful analysis in MD&A disclosures might well be more expressly directed to specific industries, e.g., the banking and pharmaceutical industries in our sample. Finally our evidence also suggests that the market assigns a higher market value to firms that are upfront with investors. In short, transparency - in terms of providing disclosures associated with current and future firm performance - pays as even though there is a differential industry effect, the market seems to reward firms that provide investors with the critical information they need to value their investments.

Disclosure, Firm Performance, Market Valuation

Abstract:
Before and after FASB Interpretation 46 (FIN 46/R) implementation, we examine the cost of capital implications that required all public companies to reexamine their variable interest entities. Faced with a potential disclosed increase in financial leverage, some analysts and managers argued that the FIN 46 disclosures would impact the firm's cost of capital, despite the FASB's stated purpose to achieve more consistent application of consolidation policies to variable interest entities - [and] more complete information about the resources, obligations, risks, and opportunities of the consolidated enterprise (FASB 2003, 7). Using a control sample design, we employ multiple proxies for cost of capital and find little evidence that FIN 46 resulted in increased costs of capital. Considering the type of VIE, we find that only firms that purchased their VIEs following FIN 46 experienced marginally higher cost of capital relative to both the matched firms and other VIE-reporting firms.

Accounting, FIN 46, Cost of Capital, Off Balance Sheet Financing

Abstract:
We examine managerial incentive factors and the economic implications of mandatory debt accounting on the firm's cost of capital in the defense industry, a significant sector of the economy. In fiscal year 1999 alone, the Department of Defense awarded $124 billion to contractors for goods and services. We consider a unique mandatory accounting treatment and its resulting cash flow or debt subsidy in this industry, the Facilities Capital Cost of Money (FCCOM). To capture a defense-contracting spending cycle, we use 1988 as the study's base year and expand our test-years to include 1982 and 1994. We include 134 firms and examine 349 firm-year observations in the study. Using a control sample of commercial firms, we first document that mandatory debt accounting impacts managerial incentives and differentially influences the use of debt covenants restricting dividends in the defense industry. We also find that incentive factors explaining debt covenants restricting dividends and additional borrowing are decidedly different for defense firms than for commercial firms. In addition, we report a significant negative relation between FCCOM and the existence of dividend covenants suggesting that, consistent with agency theory, the cash flow subsidy mitigates the need for these covenants. Finally, in a debt equity trade-off, we also demonstrate that the FCCOM debt subsidy leads to a lower cost of debt but an increased cost of equity capital within the defense sector. Our results suggest if firms face mandatory accounting that provides debt holders with a cash flow subsidy and a lower cost of debt capital, with a resultant increase in the cost of equity capital, investors seeking to minimize their risk posture may prefer to be debt holders in defense firms rather than in commercial firms, ceteris paribus.

Managerial incentives, Debt Contracting, Cost of Capital, Defense Industry

Abstract:
This study examines whether the differential disclosure and recognition requirements imposed by FIN 46 to improve transparency impact market valuation. We focus on the valuation impact of Financial Interpretation Number (FIN) 46 on firms that disclosed involvement as a synthetic lessee via the use of a variable interest entity (VIE) post-FIN 46. Synthetic leasing is our setting because contrasting the disclosures required for these leases as off-balance sheet operating leases before FIN 46 with the change to a capitalized presentation of these same leases after adoption of FIN 46 presents a unique opportunity to examine differences between financial statement recognition and disclosure. The results indicate that while disclosed future minimum lease payments are significantly valued by the market both pre- and post-FIN 46, lease liabilities recognized within the body of the financial statements are valued with substantially greater weight. Further, the new maximum risk disclosures required under FIN 46 are also valued by the market.

Financial Disclosure, Valuation, Leases

Abstract:
In this paper, we investigate the impact of both alliances and major customer relationships on operating risk, operating performance, and market returns. We examine the performance of 291 high-tech manufacturing firms that reported major customer relationships in accordance with FAS 14 (superseded by FAS 131 in 1997) and a subset of 128 firms that were also engaged in major alliance activity (research or marketing) over the period 1990 to 2002. Although managers suggest that major reasons to enter into partnerships or alliances are to reduce operating risk and increase performance, our paper is the first (to our knowledge) to examine directly this conjecture. Using a control group experimental design, we examine the performance impact of partnering relationships, and we find that impact often to be opposite managers' expectations. We employ several proxies for operating risk and find that risk generally increased during major customer relationships and research alliances. Operating performance decreases during research alliances as well as after major customer relationships. Finally, we find that the market penalizes firms that discontinue major customer relationship but rewards firms participating in research alliances.

Operating Performance, Major Customer Disclosures, Alliances

Abstract:
We extend the existing research on managerial incentives and operating performance measurement by integrating the market impact of the manager's discretionary financial and disclosures decisions to stock price performance in compensation contracts. There is evidence that managers manipulate accounting numbers to mitigate the consequences of decreasing operating performance and negative compensation effects. We argue that managers may also use discretionary financial decisions to meet market expectations and avoid compromising internal control systems. We focus on the financial decision to repurchase stock, given the prevalence and documented positive market impact of that activity. While controlling for other factors associated with stock repurchases, we examine the likelihood that firms with decreasing operating performance use stock repurchases to help meet analyst expectations to avoid stock price decreases. We find that managers that repurchase stock are also likely to benefit from higher stock prices, since they exercise more stock options in the year following the stock repurchase. We also examine whether firms that use stock repurchases use MD&A disclosures to manage expectations downward. We find that rather than managing expectations downward, managers are likely to provide more optimistic disclosures, especially when planning stock repurchases. Our results suggest that the current emphasis on stock price performance in management's compensation contracts may not eliminate managerial opportunism, given the market impact of the manager's discretionary financial and disclosures decisions.

managerial opportunism, operating performance measurement, compensation, share repurchases, discretionary disclosures

Abstract:
In this study, our primary focus is to examine the impact of major customer relationships on high-tech firms' financial performance over the period 1988 to 2004 given the firm alliance structure. We select all firms in designated high-tech industries and subdivide that sample into partnering and non-partnering firms based on whether the firm reports a major customer relationship in accordance with FAS 14 (superseded by FAS 131). Although major customer relationships sometimes evolve into or out of alliances, little is known about their impact on the firm's market and operating performance, despite required regulatory disclsoure. We further subdivide the partnering firms sub-sample based on whether those firms also announced alliances. Both major customer relationships and alliances are thought to affect revenue and cost structures and therefore enhance firm performance. Yet, the presence of a major customer relationship may constrain firm performance and limit alliance benefits. While some past results show that investors respond positively to announcements of alliances (e.g. Gleason, Mathur, and Wiggins 2003, Woolridge and Snow 1990; McConell and Nantell 1985), very little is known about the combined impact of major customer relationships and alliances on firm performance. We find little evidence that either partnership arrangement improves operating performance, although before entering partnerships, partnering firms tend to perform better than non-partnering firms. When firms with major customer relationships discontinue those relationships, operating performance worsens regardless of alliance status.

Alliance, firm performance, major customer relationship

Abstract:
In this paper, we investigate the impact of research alliances on measures of firm level financial market and operating performance risk in the biotechnology industry. We focus on biotechnology firms since research alliances have played an important role in the development and commercialization of new products, processes and technologies in that industry. Although managers suggest that a major reason to enter into alliances is to reduce operating risk, our paper is the first (to our knowledge) to examine directly this conjecture by investigating the link between alliance activity and risk from multiple perspectives. We find that for research focused firms, market and operating risk increase as their alliance activity increases. For firms which outsource research activities, however, market and operating risk decrease as alliance activity increases. The findings of our paper have the potential to help managers better understand both the benefits and costs of entering into alliance relationships and investors better evaluate the impact of alliance announcements on investment opportunities in biotechnology firms.

R&D, Alliances, Risk, Performance

Abstract:
In this paper, we investigate the impact of research alliances on various measures of firm level financial market (market) and operating performance (operating) risk in the biotechnology industry. Although managers suggest that a major reason to enter into alliances is to reduce risk, our paper is the first (to our knowledge) to examine directly this conjecture by investigating the link between alliance activity and risk from multiple perspectives. We examine not only traditional market risk measures important to investors and analysts but also measures of operating risk of direct interest to managers, suppliers, and customers. We find that the impact of alliances on firm risk depends on the role of the firm in the alliance. For research focused firms, both market and operating risk increase as their alliance activity increases. It appears that these firms may be willing to trade off increased risk for additional sources of capital. For firms which outsource research activities, however, market risk and operating risk decrease as alliance activity increases. Notably, firms that participate in some alliances as research partners and in other alliances as research outsourcers show the strongest link between alliance activity and decreased risk. These firms are typically larger than the single purpose research firms and, because of greater size or experience, better able to manage an array of partnerships.

Research Alliances, Biotechnology, Risk Measures

Abstract:
Abstract: Theory suggests that human capital investment decreases in response to an increase in the riskiness of the return on the investment which suggests a link between the uncertainty of future performance and investments in labor. While labor investment has been the subject of numerous academic studies, the notion of labor flexibility is a relatively new research issue and is of fundamental interest due to the rise of contingent labor in our competitive global economy. In this study, we investigate the relations between fixed labor investments, labor flexibility and their impact on future earnings uncertainty while controlling for capital and R& D investment. The empirical analysis compares the relative contributions of current investments in labor, labor flexibility, R&D and PP&E to future earnings variability using a sample of roughly 20,000 firm-year observations from 1970-1999. We perform extensive robustness checks and provide strong results consistent with our predictions that fixed labor investments increase the uncertainty of future earnings. In contrast, labor flexibility reduces uncertainty in future benefits. Our results have implications for management's human capital operating decisions and are consistent with the extraordinary growth in contingent employment arrangements in the United States and abroad.

Labor investment, labor flexibility, performance, earnings uncertainty

Abstract:
We examine whether accounting-based fundamental analysis can predict long term market performance in a strategic alliance context. We first evaluate whether Mohanram's (2005) G-Score explains differences in long-term buy and hold returns following announcements that firms have formed strategic alliances. We show that the G-Score does help explain future market performance following alliance announcements; however, Mohanram's signals focus on the financial characteristics of individual firms and may fail to account fully for the intangible benefits of interfirm relationships. From information disclosed in the alliance announcements and other context-specific information, we develop an alliance score (A-Score) that alone and in conjunction with the G-Score explains differences in future returns. We also document that the market does not correctly predict long term performance for the firms participating in the alliances. These results suggest that prior research that focuses on the short term reaction to alliance announcements, may overstate the benefits of alliances.

Abstract:
We examine the impact of the alignment of internal control mechanisms (governance and management control systems) with external control mechanisms on market valuation and operating performance for 1,693 firm observations over the period 2000-2006 in high versus low-growth industries. The probability of acquisition (merger activity) is used as a proxy for external control. Consistent with theory, the probability of acquisition is hypothesized to be traded off against the two internal control systems, governance and management control systems. We find that firms in high-growth industries generally experience operational benefits from an internal and external controls alignment that emphasizes external control. In contrast, we find that firms in low-growth industries benefit operationally from an alignment of internal and external controls that emphasize internal controls. Further, we find that in low-growth industries, a control alignment that favors internal controls is directly related to equity and debt market valuation effects, while in the high-growth industry, an emphasis on internal controls is inversely related to equity market valuation effects, yet directly related to debt market valuation effects. This suggests that firms in low-growth industries may not be able to take advantage of the level of external control (merger activity) and may consequently be rewarded for investments in internal control mechanisms. Conversely, in high-growth industries, merger activity or opportunity for external growth may be more important to equity investors than increased investments in internal controls. However, these same internal control investments may serve to protect debt holders who do not stand to gain from risky high-growth firm activities. Our results imply that management's investment in internal control systems may be mitigated by the firm's operational environment and its growth strategy, a matter of concern for regulators as evidenced by Sarbanes-Oxley Act.

Debt and equity markets, governance, management control systems, external corporate control market

Abstract:
We investigate the relation between earnings predictability, information asymmetry and the behavior of the adverse selection cost component of the bid-ask spread around quarterly earnings announcements for NASDAQ firms. While we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to quarterly earnings announcements for firms with less predictable earnings, we find no evidence of such changes for firms with more predictable earnings. During a non-announcement period, we find that firms with relatively less predictable earnings have consistently higher total bid-ask spreads than firms with more predictable earnings. This finding suggests that firms with relatively less predictable earnings have a higher cost of equity capital than comparable firms with more predictable earning streams, ceteris paribus. Hence, earnings predictability may be a legitimate concern of managers who wish to minimize their cost of equity capital at least as it pertains to bid-ask spreads.

earnings predictability, bid-ask spreads, cost of capital

Abstract:
This study examines the association between earnings predictability and the behavior of the bid-ask spread (transaction costs), the adverse selection cost component of the spread, and trading volume around quarterly earnings announcements. We also consider the impact of earnings volatility and frequency of accounting changes on our earnings predictability measure. Consistent with the theoretical work in the literature (e.g., Glosten and Harris (1988)), we argue that more noisy (less predictable) earnings signals aggravate the information asymmetries between privately informed investors and market-makers in the capital markets. To compensate for this informational disadvantage, the market-makers' increase in the bid-ask spread at the time of an earnings announcement is expected to be more pronounced for firms with less predictable earnings.Consistent with our differential earnings predictability argument, we find an increase in the adverse selection component of the bid-ask spread on the day of and the day prior to the earnings announcement date for firms with less predictable earnings. In contrast, we find no evidence of a significant change in the adverse selection component of the bid-ask spread around quarterly earnings announcements of firms with highly predictable earnings. Consistent with earlier studies, we find significant increases in trading volume around earnings announcements. Ceteris paribus, this higher volume should lead to lower spreads. The increase in spreads we document therefore suggest that the increased volume is not sufficient to offset the increase in the adverse selection cost faced by market-makers. Our results suggest that the predictability of the earnings signal affects transactions costs and may impact the firm's cost of capital, a matter of interest to corporate managers and shareholders.

Abstract:
Managers have long argued that the mandated disclosure of private cost information can affect a disclosing firm negatively as rival market participants can make strategic use of the information. In the presence of such "proprietary costs," managers withhold private cost information to maximize the firm's product market advantage. In contrast to managers' "proprietary costs" argument, we counter that such information may be readily available in the market in the form of inter-firm cost correlation which arises with the use of common suppliers and standard labor contracts. In an imperfectly competitive market setting, we develop an analytical model that considers how firms choose the appropriate level of accuracy of their product costing systems given the correlation between the firms' privately observed marginal cost signals. We extend earlier disclosure models (Gal-Or (1986), Darrough (1993) and Sankar (1995)) by embedding the cost disclosure issue in a product market setting where inter-firm cost signal correlation serves as an imperfect substitute for disclosure and affects the reaction of rival firms. To enrich the model, we consider costly product cost accuracy. Our results indicate that as inter-firm cost correlation increases, profit-maximizing firms have less need for accurate cost signals. When inter-firm cost correlation is high, firms can infer the rival's cost and better anticipate its quantity or pricing choice. As a result of the firm's ability to better anticipate the rival's strategy, less accurate cost signals do not put the firm at a competitive disadvantage. We demonstrate that with the appropriate level of product cost accuracy, managers can maximize profit without rival firm cost disclosure. In short, inter-firm cost correlation serves as an imperfect substitute for product cost disclosure.

Abstract:
Many researchers have claimed that costing systems that provide materially more accurate or precise cost reports have a strict value-enhancing effect on decisions (i.e., Cooper 1988, 1995; Cooper and Kaplan 1991; Christensen and Sharp 1994; Rogers, Comstock and Pritz 1994; Swenson 1995; Gupta and King 1997). However, this study provides theoretical and empirical evidence that the value of more accurate cost information may be dependent upon the firm?s competitive market structure as well as the firm?s product market strategy. We extend the theoretical work of Galor 1986 to incorporate an endogenous imprecise cost signal in two imperfect market structures: Cournot competition and Bertrand competition with imperfectly substitutable products. In addition, we theoretically link market structure to product market strategy. To examine product market strategy, we employ a laboratory markets design that allows for strategic reaction by a rival firm in each of these markets as the competitive position of a firms is determined by its capacity to produce at low cost or to differentiate its product from others (Porter 1985). Consistent with our theoretical work, we argue that firms that compete on the basis of cost leadership (which we demonstrate may be characterized as Cournot competition) benefit through increased profits from increased product cost accuracy, whereas firms that compete on the basis of product differentiation (which we demonstrate may be characterized as Bertrand competition) do not benefit by such increases. Our results are consistent with this contention. That is, profit was higher in the experimental cost leadership markets (operationalized as Cournot markets) when subjects knew their true cost while profit was higher in the experimental product differentiation markets (operationalized as Bertrand markets) when subjects received uninformative cost reports and made their decisions based on expected costs. These results suggest that the value of more accurate cost reports may be dependent upon the firm?s competitive market structure and product market strategy.

Abstract:
During the last ten years, there has been renewed interest in product costing systems. Many companies have made substantial investments in "new and better" costing systems in an attempt to obtain more precise product cost information. In this paper we consider how firms competing in duopoly markets choose the appropriate level of precision of their product costing systems given the competitive environment faced by the firm. To answer this question, we formulate and solve models similar to Gal-Or (1986) and others which rely on private cost disclosures by the rival firm. We enrich the models by introducing a cost to increase the precision of the product cost information and incorporate correlation between the firms? costs. Because of the correlation of the firms? costs, information supplied by the product costing system about a firm?s own cost allows the firm to make inferences about the rival firm?s cost. The product costing system therefore becomes an imperfect substitute for the public disclosure by the rival firm. The firm?s decision involves trading off the benefit of more precise product cost information with the cost of obtaining the increased precision. Our models show that the benefit of an investment in more precise product cost information is a function of the type of competition faced by a firm (Cournot or Bertrand), the correlation between the firm?s cost and the cost of its rival, and the cost of the system. In general, as the cost of improving the systems increases, the firm will choose less precise information. When the firms? costs are correlated, information about the firm?s own cost can also provide information about its rival?s costs and its possible quantity or pricing strategies. Therefore, firms will choose more precise product cost information as the correlation between the firms? costs increase.

Abstract:
A recurring criticism of work relating to the impact of the accuracy of product cost information on firm profit is that many studies have ignored the cost of implementing or improving a cost reporting system. Second, previous studies have been set in monopolistic (Gupta and King 1994) or competitive (Berg and Sprinkle 1995) markets. This study investigates the impact of costly product costing systems in the context of imperfectly competitive market structures. We employ a laboratory markets design to demonstrate that the value of more accurate product cost information is dependent upon the characteristics of the firm's competitive market environment. In a controlled environment, the benefits of a more accurate cost system can be measured. Specifically, our study extends the product costing literature by examining the benefit provided by more accurate product cost information under differing levels of product substitutability and correlated cost structures within the market settings of Cournot (cost leadership) and Bertrand (product differentiation) competition.We find that the benefit of more accurate product cost information, in terms of increased profit to the firm, is greatest in markets where the substitutability of the products is high. Given high substitutability of the products, the benefit is greater under Bertrand competition than Cournot competition. The correlation of the firms' costs do not significantly impact the benefit received from more accurate product cost information.