Friday, January 11, 2019
John Kepler, University of Pennsylvania - Accounting Department discusses Private Communication among Competitors and Public Disclosure.
ABSTRACT: Conventional wisdom suggests that firms benefit from coordinating pricing and production decisions. One way firms can coordinate such decisions is through private communication. However, private communication between competing firms is typically not allowed by anti-trust regulations. In the absence of private communication, theories at the intersection of accounting and industrial organization suggest that competing firms can use public disclosure to coordinate. These theories predict a substitutive relation between private communication and public disclosure that serves a coordinating role: private communication reduces the need to coordinate via public disclosure. I exploit data on the extent of private communication among competing firms in strategic alliances to examine how private communication manifests in firms’ public disclosure decisions. Consistent with theoretical predictions, I find that firms that enter into strategic alliances with competitors reduce their public disclosure about expected future business conditions, including forecasts of demand and production levels, and that the reduction is most pronounced for firms in alliances that entail more extensive private communication.