Product Market Competition and Firms’ Disclosure of Cross-segment Differences in Performance

Abstract

This study examines how product market competition affects firms’ disclosures of their individual segment's performance. We explicitly account for different types of product market competition by distinguishing between competitors who are already active in a particular market and potential competitors who are considering entering the market. Arguably, firms that are subject to intensive existing competition have lower incentives to conceal information because they are less likely to exhibit abnormal profitability. By contrast, a high level of potential competition constitutes a threat to profitability and hence provides incentives to conceal segment performance. In line with these proprietary cost arguments, we find that potential competition is negatively associated with the disclosure of cross-segment differences in performance, whereas existing competition is positively associated with the disclosure of cross-segment differences in performance. Our results remain robust to a number of sensitivity tests.