A Measure of Competition Based on 10-K Filings
Shanghai Advanced Institute of Finance, Shanghai Jiaotong University
Russell J. Lundholm
University of British Columbia - Sauder School of Business
University of Chicago - Booth School of Business
October 23, 2012
Chicago Booth Research Paper No. 11-30
Journal of Accounting Research, Forthcoming
In this paper we develop a measure of competition based on management’s disclosures in their 10-K filing and find that firms’ rates of diminishing marginal returns on new and existing investment vary significantly with our measure. We show that these firm-level disclosures are related to existing industry-level measures of disclosure (e.g. Herfindahl index), but capture something distinctly new. In particular, we show that the measure is associated with the rates of diminishing marginal returns within industry, something that traditional industry-level measures of competition cannot do by construction. We find limited and indirect evidence that management strategically makes misleading statements about their competitive landscape. However, on the whole, we find that the disclosures about competition in the 10-K are useful, and relate to firm performance in ways that suggest they meaningfully measure firm-level competition.
Number of Pages in PDF File: 55
Keywords: competition, disclosure, earnings persistence, earnings mean reversion, diminishing marginal returns
JEL Classification: D40, G12, M41
Date posted: August 15, 2011 ; Last revised: October 24, 2012
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