Do Mandatory Accounting Disclosures Impair Disclosing Firms’ Competitiveness? Evidence from Mergers and Acquisitions

Abstract

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