Journal of Accounting Research, Forthcoming
55 Pages Posted: 15 Aug 2011 Last revised: 24 Oct 2012
Date Written: October 23, 2012
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: 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