Price-Fixing Agreements and Financial Reporting Opacity

Abstract

This study investigates the effects of price-fixing agreement engagement on corporate financial reporting opacity. Using a sample of U.S. cartel firms with price-fixing agreements from 1985 to 2016, we document a significant decline of financial reporting opacity when a firm engages into a price-fixing agreement. This negative relationship is robust to a battery of tests after addressing possible endogeneity concerns. Further empirical analysis shows that the negative relationship between price-fixing agreement engagement and financial reporting opacity is strengthened by product market competition, external monitoring, but is alleviated by corporate financial distress. Our findings support that managers reduce financial reporting opacity to facilitate information communication among participants via public channel and prolong the duration of price-fixing agreements, and shed light on the dark side of financial information transparency on consumer welfare in product markets.

Keywords: Price-fixing agreement, Cartel, Financial reporting opacity, Product market competition

JEL Classification: D22, D43, L15, L41, L44, M41