Public Disclosure of Forward Contracts and Revelation of Proprietary Information

Posted: 2 Jul 2013

See all articles by John Hughes

John Hughes

Independent

Jennifer L. Kao

Independent

Michael Williams

University of Oregon - Department of Accounting

Date Written: June 1, 2001

Abstract

Financial executives of firms engaged in forward contracting have raised concerns that mandated disclosure of those contracts would reveal proprietary information to rival firms. This paper considers the basis for those concerns in the framework of a duopoly in which one privately informed producer enters the forward market prior to production. In choosing its forward position, the firm considers the effects of that position on the forward price and second stage product market competition with its rival. Two regimes are considered: mandated disclosure and no disclosure. Under the former, the contracting firm faces a tension between exploiting its information advantage in the forward market and attempting to influence the production decision of its rival. On average, in equilibrium, the contracting firm gains a first-mover advantage, but at the cost of revealing its private information to its rival and extracting less expected gains from uninformed forward market participants. In contrast, with no disclosure, the contracting firm cannot influence rival firm beliefs, but extracts more expected gains from its private information in both the forward and product markets. On balance, the contracting firm prefers no disclosure. Moreover, parameterizations exist such that the rival also prefers that regime. These findings explain the opposition of respondents to draft proposals of Statement of Financial Standards No. 133.

Suggested Citation

Hughes, John and Kao, Jennifer L. and Williams, Michael, Public Disclosure of Forward Contracts and Revelation of Proprietary Information (June 1, 2001). Review of Accounting Studies, Vol. 7, No. 4, 2002, University of Alberta School of Business Research Paper No. 2013-670, Available at SSRN: https://ssrn.com/abstract=2276119

Jennifer L. Kao

Independent

Michael Williams

University of Oregon - Department of Accounting ( email )

Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States

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