Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures

Abstract

Motivated by the FASB’s project about the disaggregation of performance information, we study a Korean rule change that allowed firms to withhold a previously mandated disaggregation of Cost of Sales (CoS). We find that after withholding, firms’ profitability increases by 7.8%. Our industry-focused results suggest that withholding affects profitability by reducing information flows between peer firms. We then document a range of evidence consistent with the idea that firms withhold disaggregating CoS to protect cost-innovations from rivals. First, we document efficiency gains following withholding of disaggregated CoS. Second, we construct a novel measure of firms’ cost innovative potential and show that it predicts withholding and subsequent profitability gains under the voluntary disclosure regime. Third, our survey-experiment of 1,257 US public firms’ managers shows that they would reduce investments in process/cost innovations if they were required to disaggregate CoS. Our study highlights to standard setters and academics that CoS disaggregation entails operational consequences for firms.

Keywords: Competition, Cost innovation, Cost structure, Disaggregated cost disclosure, Performance, Performance dispersion, Proprietary costs, Voluntary disclosure

JEL Classification: D40, D80, L15, M40