Is the risk of product market predation a cost of disclosure?

Abstract

Competitors engage in product market predation when they lower prices or increase expenditures on non-price competition with the goal of forcing a rival to exit. This study provides evidence consistent with the hypothesis that financially constrained firms avoid financial statement disclosure to mitigate the risk of product market predation. The empirical analysis examines German private firms, the majority of which failed to comply with financial statement public disclosure requirements until a regulatory change in 2006 dramatically increased the cost of non-compliance. The evidence suggests the relation between financial constraint and disclosure avoidance is increasing at an increasing rate. Consistent with the risk of predation driving this relation, the results are substantially stronger for firms with other characteristics linked to predation risk. Additional and supplemental tests, including a falsification test and analyses of ex post performance, reinforce my interpretation of the results. The findings suggest an important link between disclosure and financing decisions and contribute to the broader literature on proprietary costs of disclosure.