Do Managers Tacitly Collude to Withhold Industry-Wide Bad News?

Abstract

Our paper examines voluntary disclosure choice about a different type of “news” than traditional models consider. Firms are exposed to a continuous flow of information about industry conditions that are correlated and uncertain. We predict that capital market pressure and externality costs associated with being the second mover to disclose could make coordinated withholding of adverse industry-wide signals a difficult equilibrium to sustain. A cooperative withholding equilibrium is possible, but its sustainability depends on the structure of the industry and the nature of news in the industry. We empirically document cases of increased intra-industry obfuscation of adverse signals in annual 10-Ks, controlling for changes in fundamentals. Strategic withholding is more likely in industries with greater negative tailrisk, greater equity incentives, and industry associations that foster interpersonal connections. The results have implications for understanding when economic forces are sufficient to generate voluntary disclosure of industry-wide adverse conditions.

Keywords: voluntary disclosure, collusion, readability