Do Mandatory Accounting Disclosures Impair Disclosing Firms’ Competitiveness? Evidence from Mergers and Acquisitions
50 Pages Posted: 12 Mar 2018
Date Written: March 12, 2018
This paper examines whether mandatory accounting disclosures in financial reports impair disclosing firms’ competitiveness by inducing competitors to take actions. To capture firm-level variation in product market competition, we rely on the product similarity measure developed by Hoberg and Phillips (2016). Using M&A-related disclosures that are mandated by materiality thresholds, we find that disclosing firms experience a disproportionate increase in product similarity subsequent to M&A transactions relative to non-disclosing M&A firms. Cross-sectional analyses reveal that the effect is more pronounced when the firms obtain greater synergy gains via M&A or achieve greater product differentiation in the year of an M&A. We also document that rivals of disclosing firms are more likely to engage in an M&A transaction in the following year relative to rivals of non-disclosing firms, and that competition between an acquirer and rivals increases both when the acquirer discloses and when rivals conduct M&A. Collectively, our findings suggest that mandatory M&A-related sales and profit disclosures have an adverse impact on disclosing firms’ competitiveness in product markets.
Keywords: Real Externalities, Proprietary Cost of Disclosures, M&A, Product Market Competition, Product Similarity, Materiality
JEL Classification: G34, M41
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