Protection of Proprietary Information and Financial Reporting Opacity: Evidence from a Natural Experiment

Posted: 17 Jan 2018 Last revised: 3 Feb 2021

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Xiaohua Fang

Florida Atlantic University

Wenjun Zhang

Dalhousie University

Date Written: April 15, 2020

Abstract

We utilize the staggered adoption of the Inevitable Disclosure Doctrine (IDD) by U.S. state courts as an exogenous shock to the proprietary costs of disclosure and study the impact of the IDD on corporate financial reporting policy. We find compelling evidence that firms headquartered in states that adopt the IDD exhibit a significant increase in financial reporting opacity relative to firms headquartered in states that fail to adopt the IDD. Our finding is robust to a battery of sensitivity tests. Cross-sectional evidence shows that the impact of the IDD on opacity is more pronounced for firms with weak external monitoring. Further, our path analysis shows that financial reporting opacity engendered by the adoption of IDD had broad negative consequences for capital market investors.

Keywords: proprietary information; corporate financial reporting policy; natural experiment

JEL Classification: G34; K31; M41; P23

Suggested Citation

Callen, Jeffrey L. and Fang, Xiaohua and Zhang, Wenjun, Protection of Proprietary Information and Financial Reporting Opacity: Evidence from a Natural Experiment (April 15, 2020). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3103689

Jeffrey L. Callen (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Xiaohua Fang

Florida Atlantic University ( email )

United States

Wenjun Zhang

Dalhousie University ( email )

Halifax
Canada

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