The Effect of Financial Reporting on Strategic Investments: Evidence from Purchase Obligations 

Abstract

I examine whether mandating the disclosure of investments influences firms' strategic interactions. I exploit an SEC regulation requiring firms to report off-balance sheet purchase obligations, such as commitments to inventory purchases, CAPEX, R&D, and advertising. Motivated by theory on strategic investments, I predict and find that firms respond to the regulation by increasing investments if they have substitutive product market strategies with competitors, and decreasing investments if they have complementary strategies. This two-way finding is consistent with firms strategically using investments to influence competitors' behavior. I show that changes in investments are concentrated among dominant firms (i.e., oligopolistic firms with large market share), especially those with more irreversible investments, which have a greater ability to influence competitors' actions. I also show that they have real effects on firms' sales growth, profit margins, and market share. Collectively, my results illustrate a novel channel through which financial reporting shapes firms' investments and competition.

Keywords: strategic decisions, investment, financial reporting

JEL Classification: L11, L13, M40, M48