The Effect of Product Market Competition on Corporate Voluntary Disclosure Decisions

47 Pages Posted: 4 Nov 2002

See all articles by Yong-Chul Shin

Yong-Chul Shin

University of Massachusetts Boston

Date Written: December 2002

Abstract

This paper investigates empirically the effect of different types of product market competition on levels of voluntary disclosure of proprietary information in financial markets. Firms, considering a disclosure, trade off attaining financial market valuation-related benefits vs. protecting long-term product market advantage. Based on economic theory, I propose that there are two types of strategic interaction settings relevant to disclosure: Capacity competition drives firms to disclose more; price competition drives them to disclose less. When firms are competing on capacities, firms disclose more information to lower the cost of capital needed for capital investments. In contrast, when firms are competing on prices, they disclose less information because proprietary costs are high and the benefit from any decreased cost of capital is low due to less acute need for additional capital. By estimating the signs of the slope of reaction curves to identify the type of competition facing firms in oligopoly markets, I find that the type of product market competition affects the level of voluntary disclosure over and above what pervious literature has documented as the firm's external financing needs. That is, firms engaged in capacity competition disclose relatively more information than firms engaged in price competition. Further analysis after including as benchmarks firms with no strategic interaction, shows that capacity competition firms disclose more information than no-strategic-interaction firms but that price competition firms do not disclose less information than no-strategic-interaction firms.

Keywords: voluntary disclosure, capacity competition, price competition, strategic interactions

JEL Classification: M41, M45, L10

Suggested Citation

Shin, Yong-Chul, The Effect of Product Market Competition on Corporate Voluntary Disclosure Decisions (December 2002). Available at SSRN: https://ssrn.com/abstract=338361 or http://dx.doi.org/10.2139/ssrn.338361

Yong-Chul Shin (Contact Author)

University of Massachusetts Boston ( email )

Boston, MA 02125
United States

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