Voluntary Disclosure and Competition in Product Markets

Abstract

A voluntary disclosure setting of a multi-product firm is examined with joint delegation of production and disclosure, under the threat of new market entry and in the presence of demand uncertainty and business shocks. The necessary conditions are described that would lead the incumbent’s board to place an incentive weight to motivate voluntary segment disclosure for a product of interest. The board’s threshold is identified for providing incentives that would promote quality disclosure with high accuracy. It is shown how the incentive weight is influenced by the CEO’s inclination towards disclosure and own compensation. Lastly, it is shown that joint delegation changes the information environment for the potential entrant, with more information about the “more capable” incumbent being disclosed.

A potential conflict exists between improving disclosure quality and maintaining competitive advantage. In terms of segment disclosure, it is the tradeoff between boosting share prices and damaging competitiveness, as managers must select a proper aggregation level of segment information. The voluntary disclosure literature and motivated reasoning theory suggest that managers perceiving a high threat of new entrants will have a less favorable view of the inclusion of segment disclosures. An experiment is conducted to examine whether the threat of new entrants influences managers’ disclosure recommendations for a probable negative change in their firm’s earnings expectations and whether this effect is influenced by the firm’s disclosure policy. It is found that experienced managers are less likely to recommend disclosure when the threat of new entrants is high than when it is low and that the effect of the firm’s disclosure policy is greater when the threat of new entrants is high.