Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures

88 Pages Posted: 25 Apr 2019 Last revised: 23 Aug 2022

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago - Booth School of Business

Jung Ho Choi

Stanford University Graduate School of Business

Sorabh Tomar

Southern Methodist University (SMU) - Accounting Department

Date Written: August 21, 2022

Abstract

Motivated by the FASB’s project on the disaggregation of income statement expenses, 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 1.6 percentage points. Our industry-focused results suggest that withholding affects profitability by reducing the transfer of competitive information to peer firms. We then document a range of evidence consistent with the idea that firms withhold disaggregated CoS to protect cost-innovations from rivals. First, 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. Second, we document efficiency gains following the withholding of disaggregated CoS. 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

Suggested Citation

Berger, Philip G. and Choi, Jung Ho and Tomar, Sorabh, Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures (August 21, 2022). Stanford University Graduate School of Business Research Paper No. 19-23, Available at SSRN: https://ssrn.com/abstract=3358435 or http://dx.doi.org/10.2139/ssrn.3358435

Philip G. Berger

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)

Jung Ho Choi (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)721-8434 (Phone)

Sorabh Tomar

Southern Methodist University (SMU) - Accounting Department ( email )

United States

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