Disclosure, Co-opetition, and Disruptive Investment

Abstract

Do mandatory disclosure requirements make firms less disruptive and competitive? We offer a new theoretical perspective showing that enforcing stricter disclosure requirements can raise firm profitability and promote disruptive investments. In particular, the benefit of disclosure is that it makes it easier for firms to engage in "co-opetition" --- a strategy of simultaneous cooperation and competition. Co-opetition makes raising financing for investments in new disruptive technologies easier because it raises firms' profitability. Marginally and very attractive investment opportunities benefit the most. However, there is also a cost, as cooperation can erode the commitment to developing new disruptive technologies that can displace rivals. This commitment problem primarily affects moderately attractive investment opportunities, leading to underinvestment in such opportunities. We provide empirical evidence from the enactment of stricter disclosure requirements that supports the model's predictions.

Keywords: disclosure, competition, cooperation, co-opetition, public and private ownership, disruption, innovation.

JEL Classification: G31, G32, L41, O31