Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures

Abstract

Financial accounting affords considerable discretion to firms in aggregating internal information for external dissemination, yet little evidence exists about the consequences of such aggregation. We examine a central operational effect by studying whether withholding disaggregated cost information affects productivity. We hypothesize that, by withholding, a firm protects its productivity advantages from rivals. Using a rule change in Korea that allowed firms to withhold previously mandated Cost of Sales disaggregation, we find withholding firms’ productivity subsequently increases (relative to disclosers’). We then investigate the mechanism and show non-disclosers have cost structures distinct from those of their peers. Such distinctiveness leads to higher productivity only once firms gain disclosure flexibility. At the aggregate level, greater withholding increases productivity dispersion within industries, further consistent with nondisclosure increasing informational frictions between firms about their cost structures. Overall, our findings indicate disaggregated cost information is valuable to firms and their competitors and has productivity consequences.

Keywords: Competition, Disaggregated Cost Disclosure, Cost structure, Productivity, Productivity dispersion, Proprietary costs, Voluntary disclosure

JEL Classification: D40, D80, L15, M40