Financial Reporting and Product Markets: Learning from Competitors
34 Pages Posted: 16 Jun 2004
Date Written: May 29, 2004
Financial reporting influences competing firms by revealing information about efficient organization. It therefore plays an important role in product markets, in addition to its well-known role in share, debt and labor markets. The paper investigates the relation between the cost of disclosure and degree of competition. The model indicates that as the degree of competition intensifies the cost of disclosure rises at first but then it starts to decline and becomes almost flat with respect to the degree of competition. This relation does not vary significantly when the model is extended to include cost uncertainty (regardless of whether the reporting decision was made ex post or ex ante). However, in an ex post setting including both cost uncertainty and learning between competitors, the relation between reporting decisions and degree of competition is positive (excluding the case of monopolies). The model further suggests that publication of financial reports increases social welfare. The paper briefly explores additional implications of its approach to proprietary costs, such as the relation between disclosure, development of capital markets and investment decisions.
Keywords: Proprietary costs, Information Spillovers
JEL Classification: M41, M45, M21, D82
Suggested Citation: Suggested Citation