Review of Accounting Studies, 5, 57–85 (2000)
2000 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
Competitive Effects of Disclosure in a Strategic
School of Accountancy, College of Business, Box 873606, Arizona State University, Tempe, AZ 85287-3606
ALISON J. KIRBY
School of Management, 595 Commonwealth Avenue, Boston University, Boston, MA 02215
Abstract. We investigate the welfare consequences of incumbent ﬁrms’ mutual disclosure of cost information
when there is a threat of entry from a ﬁrm not required to disclose its private cost information. New effects
of disclosure are observed relative to no-entry models, with the result that incumbents’ expected output is a
decreasing function of the disclosure level. However, further analysis shows that increased disclosure usually
increases incumbent expected proﬁts and decreases expected consumer surplus, despite the additional entry effect
of disclosure. Such analytical derivations provide objective input to the FASB as they attempt to predict the
competitive effects of changing mandated disclosure requirements.
Keywords: Disclosure, competitive effects, entry, oligopoly
It is widely recognized that the mandatory disclosure of ﬁnancial statements by a ﬁrm
provides information to competitors. In its mission to establish standards of ﬁnancial
reporting, the Financial Accounting Standards Board (FASB) tries to anticipate these re-
ciprocal competitive effects of changes in disclosure requirements. To that end the FASB
may examine submissions made by affected parties for comments on competitive effects.
For example, 89 of the 107 letters opposing the FASB’s Proposed Statement for Reporting
Disaggregated Information (out of the 116 letters received from members of the National
Association of Manufacturers) cited competitive disadvantage as their reason for opposi-
tion (Herrmann and Wayne, 1997).
Alternatively, the FASB could rely on a theoretical
model to develop predictions regarding the competitive effects on ﬁrms’ and consumers’
welfare of changing disclosure requirements. The latter is the approach adopted in this and
other recent papers in the accounting literature.
In particular, we develop a model which
predicts the net competitive effects of ﬁrms mutually disclosing their ﬁrm speciﬁc cost
Research in the stochastic oligopoly literature investigating the incentives of ﬁrms to
share information (in situations where they can precommit to such disclosures) has shown
that sharing of cost information is beneﬁcial to ﬁrms, and that sharing of market demand
information is not(Shapiro, 1986; Clarke, 1983).
These papers, however, missa potentially
important effect of this information, namely its effect on entry. For example, Ford entered
the spark plug manufacturing market after it learned of the proﬁts being made by Champion
Spark Plug, proﬁts that were only revealed once Champion went public and had to disclose
Ourobjectiveistoinvestigate the sensitivityoftheinformation