Advertisement

Review of Accounting Studies

, Volume 15, Issue 3, pp 663–711 | Cite as

The impacts of product market competition on the quantity and quality of voluntary disclosures

Article

Abstract

This study examines how firms’ voluntary disclosure decisions are influenced by product market competition. Using separate measures to capture different dimensions of competition, I show that competition from potential entrants increases disclosure quantity while competition from existing rivals decreases disclosure quantity. I also find that competition enhances disclosure quality mainly through reducing the optimism in profit forecasts and reducing the pessimism in investment forecasts. Moreover, I find that the above association is less pronounced for industry leaders, consistent with industry leaders facing less competitive pressures than industry followers.

Keywords

Product market Potential competition Existing competition Profits Investments Management forecasts 

JEL classification

D4 D80 L1 M40 M41 

Notes

Acknowledgments

I am grateful to my supervisor, Lakshmanan Shivakumar, for his support and guidance. I appreciate comments from the editor, Stephen Penman, two anonymous referees, the discussant, Christo Karuna, and other participants at the 2009 Review of Accounting Studies Conference. I also thank Maria Correia, Francesca Franco, Julian Franks, Emeric Henry, Oguzhan Karakaş, Ningzhong Li, Yun Lou, Ane Tamayo, İrem Tuna, Oktay Urcan, Florin Vasvari, Paolo Volpin, Li Zhang, and workshop participants at University of Minnesota, University of Pittsburgh, McGill University, University of Illinois at Chicago, University of Washington, University of Georgia, University of Southern California, Temple University, Ohio State University, Boston College, London School of Economics and Political Science, HEC Paris, ESSEC Business School, INSEAD, Lancaster University, Singapore Management University, National University of Singapore, and Nanyang Technological University.

References

  1. Ajinkya, B., Bhojraj, S., & Sengupta, P. (2005). The association between outside directors, institutional investors and the properties of management earnings forecasts. Journal of Accounting Research, 43, 343–375.CrossRefGoogle Scholar
  2. Ajinkya, B., & Gift, M. (1984). Corporate managers’ earnings forecasts and symmetrical adjustments of market expectations. Journal of Accounting Research, 22, 425–444.CrossRefGoogle Scholar
  3. Ali, A., Klasa, S., & Yeung, E. (2009). The limitations of industry concentration measures constructed with Compustat data: Implications for finance research. Review of Financial Studies, 22, 3839–3871.CrossRefGoogle Scholar
  4. Anilowski, C., Feng, M., & Skinner, D. (2007). Does earnings guidence affect market returns? The nature and information content of aggregate earnings guidance. Journal of Accounting and Economics, 44, 36–63.CrossRefGoogle Scholar
  5. Baginski, S. P., & Hassell, J. M. (1997). Determinants of management forecast precision. The Accounting Review, 72, 303–312.Google Scholar
  6. Bamber, L. S., & Cheon, Y. S. (1998). Discretionary management earnings forecast disclosures: Antecedents and outcomes associated with forecast venue and forecast specificity choices. Journal of Accounting Research, 36, 167–190.CrossRefGoogle Scholar
  7. Bhojraj, S., Blacconiere, W. G., & D’Souza, J. D. (2004). Voluntary disclosure in a multi-audience setting: An empirical investigation. The Accounting Review, 79, 921–947.CrossRefGoogle Scholar
  8. Bolton, P., & Scharfstein, D. S. (1990). A theory of predation based on agency problems in financial contracting. American Economic Review, 80, 93–106.Google Scholar
  9. Botosan, C. A., & Stanford, M. (2005). Managers’ motives to withhold segment disclosures and the effect of SFAS No. 131 on analysts’ information environment. The Accounting Review, 80, 751–771.CrossRefGoogle Scholar
  10. Bresnahan, T. F. (1989). Empirical studies of industries with market power. In Chapter 17 handbook of industiral organization. Amsterdam: North-Holland.Google Scholar
  11. Brown, N. C., Gordon, L. A., & Wermers, R. R. (2006). Herd behavior in voluntary disclosure decisions: An examination of capital expenditure forecasts. Working paper.Google Scholar
  12. Chevalier, J. A. (1995). Capital structure and product-market competition: Empirical evidence from the supermarket industry. American Economic Review, 85, 415–435.Google Scholar
  13. Chung, K. H., Wright, P., & Charoenwong, C. (1998). Investment opportunities and market reaction to capital expenditure decisions. Journal of Banking and Finance, 22, 41–60.CrossRefGoogle Scholar
  14. Claessens, S., & Laeven, L. (2004). What drives bank competition? Some international evidence. Journal of Money, Credit and Banking, 36, 563–583.CrossRefGoogle Scholar
  15. Clarkson, P. M., Kao, J. L., & Richardson, G. D. (1994). The voluntary inclusion of forecasts in the MD&A section of annual reports. Contemporary Accounting Research, 11, 423–450.CrossRefGoogle Scholar
  16. Clinch, G., & Verrecchia, R. E. (1997). Competitive disadvantage and discretionary disclosure in industries. Australian Journal of Management, 22, 125–137.CrossRefGoogle Scholar
  17. Cotter, J., Tuna, I., & Wysocki, P. D. (2006). Expectations management and beatable targets: How do analysts react to explicit earnings guidance? Contemporary Accounting Research, 23, 593–624.CrossRefGoogle Scholar
  18. Darrough, M. N., & Stoughton, N. M. (1990). Financial disclosure policy in an entry game. Journal of Accounting and Economics, 12, 219–243.CrossRefGoogle Scholar
  19. Dye, R. A. (1985). Disclosure of nonproprietary information. Journal of Accounting Research, 23, 123–145.CrossRefGoogle Scholar
  20. Dye, R. A., & Sridhar, S. S. (1995). Industry-wide disclosure dynamics. Journal of Accounting Research, 33, 157–174.CrossRefGoogle Scholar
  21. Easley, D., & O’Hara, M. (2004). Information and the cost of capital. Journal of Finance, 47, 577–605.CrossRefGoogle Scholar
  22. Evans, J. H., & Sridhar, S. S. (2002). Disclosure-disciplining mechanisms: Capital markets, product markets, and shareholder litigation. The Accounting Review, 77, 595–626.CrossRefGoogle Scholar
  23. Frankel, R., McNichols, M., & Wilson, G. P. (1995). Discretionary disclosure and external financing. The Accounting Review, 70, 135–150.Google Scholar
  24. Fudenberg, D., & Tirole, J. (1983). Capital as a commitment: Strategic investment to deter mobility. Journal of Economic Theory, 31, 227–250.CrossRefGoogle Scholar
  25. Fudenberg, D., & Tirole, J. (1986). A “signal-jamming” theory of predation. The RAND Journal of Economics, 17, 366–376.CrossRefGoogle Scholar
  26. Gigler, F. (1994). Self-enforcing voluntary disclosures. Journal of Accounting Research, 32, 224–240.CrossRefGoogle Scholar
  27. Graham, J. R., Harvey, C. R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting. Journal of Accounting and Economics, 40, 3–73.CrossRefGoogle Scholar
  28. Grossman, S. J. (1981). The role of warranties and private disclosure about product quality. Journal of Law and Economics, 24, 461–483.CrossRefGoogle Scholar
  29. Grossman, S. J., & Hart, O. D. (1980). Disclosure laws and takeover bids. Journal of Finance, 35, 323–334.CrossRefGoogle Scholar
  30. Guo, R. J., Lev, B., & Zhou, N. (2004). Competitive costs and disclosure by biotech IPOs. Journal of Accounting Research, 42, 319–355.CrossRefGoogle Scholar
  31. Harris, M. S. (1998). The association between competition and managers’ business segment reporting decisions. Journal of Accounting Research, 36, 111–128.CrossRefGoogle Scholar
  32. Healy, P. M., & Palepu, K. G. (2001). Information asymmetry, corporate disclosure, and capital markets: A review of the empirical disclosure literature. Journal of Accounting and Economics, 31, 405–440.CrossRefGoogle Scholar
  33. Helms, M. M., & Wright, P. (1997). Planning prospects for industry followers. Marketing Intelligence and Planning, 15, 135–141.CrossRefGoogle Scholar
  34. Hutton, A. P., & Stocken, P. C. (2009). Prior forecasting accuracy and investor reaction to management earnings forecasts. Working paper.Google Scholar
  35. Johnson, M. F., Kasznik, R., & Nelson, K. K. (2001). The impact of securities litigation reform on the disclosure of forward-looking information by high technology firms. Journal of Accounting Research, 39, 297–327.CrossRefGoogle Scholar
  36. Jones, C. L., & Cole, C. J. (2008). The quality of management forecasts of capital expenditures and store openings. Working Paper.Google Scholar
  37. Jung, W.-O., & Kwon, Y. K. (1988). Disclosure when the market is unsure of information endowment of managers. Journal of Accounting Research, 26, 146–153.CrossRefGoogle Scholar
  38. Karuna, C. (2007). Industry product market competition and managerial incentives. Journal of Accounting and Economics, 43, 275–297.CrossRefGoogle Scholar
  39. Kasznik, R. (1999). On the association between voluntary disclosure and earnings management. Journal of Accounting Research, 37, 57–81.CrossRefGoogle Scholar
  40. Kothari, S. P., Shu, S., & Wysocki, P. D. (2009). Do managers withhold bad news? Journal of Accounting Research, 47, 241–276.CrossRefGoogle Scholar
  41. Lambert, R., Leuz, C., & Verrecchia, R. E. (2007). Accounting information, disclosure, and the cost of capital. Journal of Accounting Research, 45, 385–420.CrossRefGoogle Scholar
  42. Lang, M., & Lundholm, R. (1993). Cross-sectional determinants of analyst ratings of corporate disclosures. Journal of Accounting Research, 31, 246–271.CrossRefGoogle Scholar
  43. Lev, B., & Penman, S. H. (1989). Voluntary forecast disclosure, nondisclosure, and stock prices. Journal of Accounting Research, 28, 49–76.CrossRefGoogle Scholar
  44. Matsumoto, D. A. (2002). Management’s incentives to avoid negative earnings surprises. The Accounting Review, 77, 483–514.CrossRefGoogle Scholar
  45. McConnell, J. J., & Muscarella, C. J. (1985). Corporate captial expenditure decisions and the market value of the firm. Journal of Financial Economics, 14, 399–422.CrossRefGoogle Scholar
  46. McNichols, M. (1989). Evidence of informational asymmetries from management earnings forecasts and stock returns. The Accounting Review, 64, 1–27.Google Scholar
  47. Milgrom, P. (1981). Good news and bad news: Representation theorems and applications. Bell Journal of Economics, 12, 380–391.CrossRefGoogle Scholar
  48. Miller, G. (2002). Earnings performance and discretionary disclosure. Journal of Accounting Research, 40, 173–204.CrossRefGoogle Scholar
  49. Nakao, T. (1980). Demand growth, profitability, and entry. Quarterly Journal of Economics, 94, 397–411.CrossRefGoogle Scholar
  50. Newman, P., & Sansing, R. (1993). Disclosure policies with multiple users. Journal of Accounting Research, 31, 92–112.CrossRefGoogle Scholar
  51. Nickell, S. J. (1996). Competition and corporate performance. The Journal of Political Economy, 104, 724–746.CrossRefGoogle Scholar
  52. Nickell, S. J., Wadhwani, S., & Wall, M. (1992). Productivity growth in UK companies, 1975–1986. European Economic Review, 36, 1055–1091.CrossRefGoogle Scholar
  53. Panzar, J. C., & Rosse, J. N. (1987). Testing for “monopoly” equilibrium. Journal of Industrial Economics, 35, 443–456.CrossRefGoogle Scholar
  54. Philips, L. (1976). Effects of industrial concentration: A cross-section analysis for the common market. Amsterdam: North Holland.Google Scholar
  55. Raith, M. (2003). Competition, risk and managerial incentives. American Economic Review, 93, 1425–1436.CrossRefGoogle Scholar
  56. Rogers, J. L., & Stocken, P. C. (2005). Credibility of management forecast. The Accounting Review, 80, 1233–1260.CrossRefGoogle Scholar
  57. Scott, T. W. (1994). Incentives and disincentives for financial disclosure: Voluntary disclosure of defined benefit pension plan information by Canadian firms. The Accounting Review, 36, 111–128.Google Scholar
  58. Shaked, A., & Sutton, J. (1982). Relaxing price competition through product differentiation. The Review of Economic Studies, 49, 3–13.CrossRefGoogle Scholar
  59. Shin, Y.-C. (2002). The effect of product market competition on corporate voluntary disclosure decisions. Working Paper.Google Scholar
  60. Skinner, D. J. (1994). Why firms voluntarily disclose bad news? Journal of Accounting Research, 32, 38–60.CrossRefGoogle Scholar
  61. Spence, A. M. (1977). Entry, capacity, investment and oligopolistic pricing. The Bell Journal of Economics, 88, 534–544.CrossRefGoogle Scholar
  62. Sutton, J. (1991). Sunk costs and market structure. Cambridge, MA: MIT Press.Google Scholar
  63. Tse, S., & Tucker, J. W. (forthcoming). Within-industry timing of earnings warnings: Do managers herd. Review of Accounting Studies.Google Scholar
  64. Verrecchia, R. E. (1983). Discretionary disclosure. Journal of Accounting and Economics, 5, 179–194.CrossRefGoogle Scholar
  65. Verrecchia, R. E. (1990). Endogenous proprietary costs through firm interdependence. Journal of Accounting and Economics, 12, 245–250.CrossRefGoogle Scholar
  66. Verrecchia, R. E. (2001). Essays on disclosure. Journal of Accounting and Economics, 32, 97–180.CrossRefGoogle Scholar
  67. Verrecchia, R. E., & Weber, J. (2006). Redacted disclosure. Journal of Accounting Research, 44, 791–814.CrossRefGoogle Scholar
  68. Wagenhofer, A. (1990). Voluntary disclosure with a strategic opponent. Journal of Accounting and Economics, 12, 341–363.CrossRefGoogle Scholar
  69. Waymire, G. (1985). Earnings volatility and voluntary management forecast disclosure. Journal of Accounting Research, 23, 268–295.CrossRefGoogle Scholar
  70. Wright, P. (1986). The strategic options of least cost, differentiation, and niche. Business Horizons, 29, 21–26.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  1. 1.London Business SchoolLondonUK

Personalised recommendations