The Role of Information Transparency in the Product Market: An Examination of the Sustainability of Profitability Differences

Review of Accounting Studies

38 Pages Posted: 22 Mar 2021 Last revised: 1 Jun 2022

See all articles by Ivy Ruyun Feng

Ivy Ruyun Feng

University of Wisconsin Madison-Wisconsin School of Business

Michael D. Kimbrough

University of Maryland - Robert H. Smith School of Business

Sijing Wei

Creighton University - Heider College of Business

Date Written: July 18, 2021

Abstract

We investigate whether information transparency at the industry level is associated with the sustainability of within-industry differences in profitability. Since competitive actions lead to the elimination of intra-industry profitability differences, this investigation provides evidence on whether competitors act on information about their rivals. Using an industry-level transparency measure that integrates corporate reporting by firm managers, private information search and communication by analysts, and information dissemination by the media, we find that transparency is associated with faster reductions in within-industry profitability differences. Using aggregate financial statement data for public and private firms provided by the U.S. Census Bureau, we further find that differences in profitability between public and private firms are less persistent when public firms’ profitability exceeds private firms’ profitability, consistent with theoretical and anecdotal arguments that public firms are at a competitive disadvantage because they are required to be more transparent than their private firm counterparts. Our results are robust to the use of local newspaper closures and mergers as exogenous shocks to transparency. Collectively, these findings indicate that information transparency facilitates the competitive forces that lead to the erosion of profitability differences within an industry. We further demonstrate that information transparency is positively associated with the degree to which competitors enter or exit an industry in anticipation of changes in the industry’s profitability outlook.

Keywords: Information Transparency, Profitability Convergence, Proprietary Costs, Earnings Persistence, Product Market Competition, Abnormal Profits

JEL Classification: D41, D80, L15, M41

Suggested Citation

Feng, Ivy Ruyun and Kimbrough, Michael D. and Wei, Sijing, The Role of Information Transparency in the Product Market: An Examination of the Sustainability of Profitability Differences (July 18, 2021). Review of Accounting Studies, Available at SSRN: https://ssrn.com/abstract=3794672

Ivy Ruyun Feng

University of Wisconsin Madison-Wisconsin School of Business

Michael D. Kimbrough (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States
301-405-8222 (Phone)
301-314-9414 (Fax)

Sijing Wei

Creighton University - Heider College of Business ( email )

602 N 20th St
Omaha, NE Nebraska 68102
United States
402-280-1297 (Phone)

HOME PAGE: http://https://business.creighton.edu/

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
295
Abstract Views
1,161
Rank
196,129
PlumX Metrics