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A Measure of Competition Based on 10-K Filings

Chicago Booth Research Paper No. 11-30

Journal of Accounting Research, Forthcoming

55 Pages Posted: 15 Aug 2011 Last revised: 24 Oct 2012

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University

Russell J. Lundholm

University of British Columbia - Sauder School of Business

Michael Minnis

University of Chicago - Booth School of Business

Date Written: October 23, 2012

Abstract

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.

Keywords: competition, disclosure, earnings persistence, earnings mean reversion, diminishing marginal returns

JEL Classification: D40, G12, M41

Suggested Citation

Li, Feng and Lundholm, Russell J. and Minnis, Michael, A Measure of Competition Based on 10-K Filings (October 23, 2012). Chicago Booth Research Paper No. 11-30. Available at SSRN: https://ssrn.com/abstract=1908338 or http://dx.doi.org/10.2139/ssrn.1908338

Feng Li

Shanghai Advanced Institute of Finance, Shanghai Jiaotong University ( email )

211 West Huaihai Road
Shanghai, Shanghai 200030
China

Russell J. Lundholm

University of British Columbia - Sauder School of Business ( email )

2053 Main Hall
Vancouver, British Columbia V6T 1Z2
Canada

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

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