Review of Accounting Studies, 7, 459–478, 2002
2002 Kluwer Academic Publishers. Manufactured in The Netherlands.
Public Disclosure of Forward Contracts
and Revelation of Proprietary Information
JOHN S. HUGHES
Professor, Department of Accounting, The Anderson Graduate School of Management, University of California
at Los Angeles, Los Angeles, California, CA 90095-1481, U.S.A.
JENNIFER L. KAO
Associate Professor, Department of Accounting and MIS, Faculty of Business, University of Alberta, Edmonton,
Alberta, T6G 2R6, Canada
Assistant Professor, Department of Accounting, The Anderson Graduate School of Management, University of
California at Los Angeles, Los Angeles, California, CA 90095-1481, U.S.A.
Abstract. Financial executives of ﬁrms engaged in forward contracting have raised concerns that mandated
disclosure of those contracts would reveal proprietary information to rival ﬁrms. This paper considers the basis for
those concerns in the framework of a duopoly in which one privately informed producer enters the forward market
prior to production. In choosing its forward position, the ﬁrm considers the effects of that position on the forward
price and second stage product market competition with its rival. Two regimes are considered: mandated disclosure
and no disclosure. Under the former, the contracting ﬁrm faces a tension between exploiting its information
advantage in the forward market and attempting to inﬂuence the production decision of its rival. On average, in
equilibrium, the contracting ﬁrm gains a ﬁrst-mover advantage, but at the cost of revealing its private information
to its rival and extracting less expected gains from uninformed forward market participants. In contrast, with
no disclosure, the contracting ﬁrm cannot inﬂuence rival ﬁrm beliefs, but extracts more expected gains from its
private information in both the forward and product markets. On balance, the contracting ﬁrm prefers no disclosure.
Moreover, parameterizations exist such that the rival also prefers that regime. These ﬁndings explain the opposition
of respondents to draft proposals of Statement of Financial Standards No. 133.
Keywords: disclosure, forward contracts, ﬁrst-mover advantage, private information
JEL Classiﬁcation: L13, M41
Controversy has surrounded accounting disclosure of derivative instruments for some time.
With respect to forward contracts, executives of ﬁrms employing such contracts have argued
that disclosure of contract terms would reveal proprietary information injurious to their com-
petitive positions. Of late, this concern has been raised in response to the draft proposals of
Statement of Financial Accounting Standards No. 133 (SFAS No. 133) entitled Accounting
for Derivative Instruments and Hedging Activities. For example, in commenting on the re-
sults of a survey of over 300 ﬁnancial executives by the Treasury Management Association
(TMA) in 1997, Thomas Logan, Chairman of TMA, noted three major objections to more
disclosure of derivatives including the following assessment of the effect on competition:
“Half of the respondents to the TMA survey stated that at least some of the disclosures
required by the proposed FASB and SEC requirements would be proprietary information
that could provide competitors with an unfair business advantage.”