Disclosure Regulation and the Competition between Public and Private Firms: The Case of Segment Reporting

This study investigates whether the mandatory disclosure of proprietary information under SFAS 131 puts US public firms at a competitive disadvantage to private firms. I assume that industries that lobbied against the proposed standard would incur higher proprietary disclosure costs from SFAS 131 than other industries and I identify lobbying industries based on companies' comment letters on the Exposure Draft of the standard. I find that an industry was more likely to lobby against the standard if public firms in that industry as a whole commanded a larger market share, enjoyed more persistent abnormal profits, had higher R&D activities, and faced more private competitors. In my primary test I find that after the adoption of SFAS 131, public firms in a lobbying industry experienced a significant decline in their aggregate product market share relative to those in a non-lobbying industry, confirming companies' concerns about the competitive harm of disclosures required by SFAS 131. My study contributes to the literature by providing evidence on the real market-wide effects, as opposed to the informational firm-specific effects, of a disclosure regulation.