Disclosure to Competitors in Light of Endogenous Firm Investments

Abstract

It has long been recognized that competitive considerations play a central role in corporate voluntary disclosure practices. Yet, the ways in which competition and disclosure interact are sensitive to various factors, including both the nature of information and the nature of competitive interactions. Cognizant of this subtlety, we extend a familiar disclosure model to incorporate the practical feature that firms may not only hold private information about consumer demand, but that they can also influence demand by the investments they choose to make. Such investments in bolstering brand loyalty, product quality, cost savings, and the like are not only central to firm strategy but, as the paper demonstrates, they also stand to significantly influence both the preference for and timing of disclosures. Interestingly, while investment considerations introduce additional economic forces, they do so in a manner that permits the development of a unifying and robust theme to encompass our theoretical understanding of the interplay between competition and disclosure.

Keywords: competition; disclosure; innovation; investment; product quality; spillover

JEL Classification: D82; L13; M41