Proprietary versus Non-Proprietary Disclosures: Evidence from Germany
University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network
Discretionary disclosure theory suggests that proprietary costs are an important reason why firms often withhold material information. However, empirically testing this hypothesis has proven to be difficult, due especially to the elusive nature of proprietary costs and lack of settings in which proprietary disclosures are voluntary. This paper exploits the fact that that until recently, German firms were not required to disclose business segment reports, which are generally viewed as competitively sensitive and proprietary in nature. Analyzing firms' voluntary business segment disclosures, I find evidence consistent with the proprietary cost hypothesis. As Germany now requires segment reporting by all listed firms, I also examine ex post whether segment reporting is more revealing for those firms that previously chose not to disclose. I find that firms are less likely to voluntarily provide segment reports if segment profitability is more heterogeneous and the average profitability reported in the income statement is less revealing. This finding is also consistent with the proprietary cost hypothesis and shows that segment disclosures are not governed by capital-market considerations alone. I benchmark my findings using voluntary cash flow statement disclosures. In comparison to segment reports, which likely reveal proprietary information to competitors, cash flow statements are less competitively sensitive. I find that cash flow disclosures appear to be governed primarily by capital-market considerations. This finding lends further support to the proprietary cost interpretation of the segment reporting results.
Number of Pages in PDF File: 45
Keywords: Proprietary Costs, Voluntary disclosure, Competitive harm, Disclosure costs, Segment disclosures, Cash flow statements
JEL Classification: M41, M45
Date posted: April 16, 2004