Do more strict accounting laws, designed to help shareholders gain better insight into corporations, ultimately harm a firm’s competitive position by forcing disclosure of proprietary information?
The answer appears to be yes, according to UConn accounting Professor Ying Zhou, who has spent years analyzing the consequences of such mandates.
“A Lobbying Approach to Evaluating the Competitive Harm of Mandatory Disclosure of Proprietary Information: The Case of Segment Reporting,” which was the basis of Zhou’s Ph.D. dissertation, is now in second-round review with a top-tier accounting journal. She also presented her findings in January at the 2018 Financial Accounting and Reporting Section Midyear Meeting in Austin, Texas.
The focus of her research circles around a requirement, widely implemented in 1998, that forced companies to expand their segment disclosure. In the past, under the original reporting plan, called SFAS-14, enterprises grouped products and services by industry lines. The loose definition of “industry” permitted flexibility and discretion and allowed managers of some diversified firms to report all operations in a single, broadly defined segment. Some large companies had combined information about their myriad businesses in one report, failing to distinguish different factions of the business. They often cited proprietary information as the reason.
But regulators wanted more disclosure in the interest of informing and protecting investors. The Financial Accounting Standards Board adopted SFAS-131, and argued that financial preparers could provide the additional information promptly and inexpensively.
Yet an overwhelming majority of lobbying firms opposed the proposal and argued for a competitive-harm exemption, saying the reporting plan could compromise firms’ strategic and competitive interests. The new public information revealed under SFAS-131 was not previously available via other channels.
“When the accounting changes were proposed, firms were reluctant. In fact many lobbied vigorously against these changes,” Zhou said.
To study the impact of the new regulations, Zhou collected written evidence from companies that lobbied against the changes citing a competitive disadvantage. She tracked and studied 138 of those firms, examining their performance both two years prior to the initial proposal and two years after the accounting change was implemented. She found that among those companies that objected to the new accounting standards, operating performance declined for firms that changed their segment reporting, but not for those that continued to report the same segments. She tested her results by comparing a separate control group, whose performance stayed on par.
Further analysis revealed that there was little change in sales growth but a significant increase in selling, general, and administrative (SG&A) expenses per dollar of sales, suggesting an unusual sales effort to maintain market share in an intensified competitive environment. Segment profitability analysis showed that the decline in performance is attributable to the new segments disclosed under the new rule.
To further her results, Zhou also studied 10 professional associations that had lobbied against the new requirements. She found a significant decline in profitability for non-lobbying firms if their associations voiced the concern of competitive harm.
“The results lend support to corporate concerns about competitive harm caused by extensive disclosure,” she said. “Some of this information can truly be proprietary.”
“In accounting literature, the existence of proprietary costs has been used extensively as the rational explanation for non-disclosure in many settings,” she said. “However there is little evidence that mandatory disclosure of proprietary information really results in competitive harm—until now.”