Corporate Disclosure as a Tacit Coordination Mechanism: Evidence from Cartel Enforcement Regulations

• Author: ALMINAS ŽALDOKAS,THOMAS BOURVEAU,GUOMAN SHE
• Published date: 01 May 2020
• Date: 01 May 2020
• DOI: http://doi.org/10.1111/1475-679X.12301

DOI: 10.1111/1475-679X.12301

Journal of Accounting Research

Vol. 58 No. 2 May 2020

Printed in U.S.A.

Corporate Disclosure as a Tacit

Coordination Mechanism: Evidence

from Cartel Enforcement

Regulations

THOMAS BOURVEAU ,∗GUOMAN SHE ,†

AND ALMINAS ˇ

ZALDOKAS †

Received 27 November 2018; accepted 6 February 2020

ABSTRACT

We empirically study how collusion in product markets affects firms’ financial

disclosure strategies. We find that after a rise in cartel enforcement, U.S. firms

start sharing more detailed information in their financial disclosure about

their customers, contracts, and products. This new information potentially

benefits peers by helping to tacitly coordinate actions in product markets.

∗Columbia University Business School; †Hong Kong University of Science and Technology,

Business School.

Accepted by Haresh Sapra. We thank the editor and the anonymous referee for their

constructive comments and guidance. We thank our discussants Julian Atanassov, Luzi Hail,

Rachel Hayes, Gerard Hoberg, Hyo Kang, John Kepler, Vardges Levonyan, Xi Li, Tse-Chun

Lin, Tim Loughran, Leslie Marx, Mike Minnis, Vladimir Mukharlyamov,Vikram Nanda, Kevin

Tseng, Jiang Xuefeng, and Xintong Zhan for comments that helped to improve this paper.

We also thank Sumit Agarwal, Phil Berger, Jeremy Bertomeu, Matthias Breuer, Jason Chen,

Hans Christensen, Anna Costello, Sudipto Dasgupta, Wouter Dessein, Hila Fogel-Yaari, Joey

Engelberg, Eric Floyd, Yuk-Fai Fong, Jonathan Glover, Kai Wai Hui, Bruno Jullien, Chris-

tian Leuz, J¯

ura Liaukonyt˙

e, Daniele Macciocchi, Nathan Miller, Jeff Ng, Kasper Meisner

Nielsen, Giorgo Sertsios, Daniel D. Sokol, Yossi Spiegel, Rodrigo Verdi, Stefan Zeume, and

Guochang Zhang, as well as participants at the 2017 HK Junior Accounting Faculty Confer-

ence, the 2017 CEIBS Accounting and Finance Conference, the 2017 ABFER Conference, the

2017 FMA Asia Meetings, the 2017 Barcelona GSE Summer Forum Applied IO Workshop,

the 2017 Colorado Summer Accounting Research Conference, the 2017 LBS Accounting

295

CUniversity of Chicago on behalf of the Accounting Research Center, 2020

296 T.BOURVEAU,G.SHE,AND A.ˇ

ZALDOKAS

Indeed, changes in disclosure are associated with higher future profitability.

Our results highlight the potential conflict between securities and antitrust

regulations.

JEL codes: D22; D43; G38; L15; L41; L44; M41

Keywords: financial disclosure; antitrust enforcement; collusion; tacit

coordination

1. Introduction

Financial market regulation has been strengthening over time. Legislation

such as Regulation FD and the Sarbanes–Oxley Act have mandated that

publicly listed firms increase transparency by disclosing more information

in their financial statements. Such disclosure reduces the cost of capital,

levels the information playing field for different investors, and allows in-

vestors to monitor managers more efficiently through reduced informa-

tion asymmetry (Leuz and Wysocki [2016], Goldstein and Yang [2017]).

However, transparency can come at a cost to consumers in product mar-

kets. Indeed, regulators have been expressing concerns about unintended

product-market consequences of increasing transparency in financial mar-

kets, as doing so could provide firms with ways to coordinate product-

market actions.1

In this paper, we aim to shed light on this unexplored cost of trans-

parency in financial markets by examining empirically whether firms use

Symposium, the 2017 Lithuanian Conference on Economic Research, the 2017 CRESSE,

the 2017 CICF, the 2017 SAIF-CKGSB Summer Institute of Finance, the informal session

at the 2017 CEPR ESSFM (Gerzensee), the 2018 Northeastern University Finance Confer-

ence, the 2018 Texas A&M Young Scholars Finance Consortium, the 2018 CEPR Spring

Symposium in Financial Economics, the 2018 FIRS Conference, the 2018 Asian Finance As-

sociation Annual Conference, the 2019 Midwest Finance Association Annual Meeting, the

2019 International Industrial Organization conference, the 2019 Journal of Accounting Re-

search conference, the 6th SEC Annual Conference on Financial Market Regulation, the

2019 European Finance Association Annual Meeting, the 2019 FTC Microeconomics Con-

ference, the 2020 American Finance Association Annual Meeting, the seminar participants

at the University of Michigan, Columbia University, Georgetown University, the University

of California San Diego, Darden Business School, University of Texas School of Law, Geor-

gia Institute of Technology, Southern Methodist University, the University of Texasat Austin,

Purdue University, University of Illinois at Chicago, the Columbia Micro-economics Lunch

Seminar, Bank of Lithuania, the Lithuanian Competition Council, Seoul National Univer-

sity, and the HKUST. Bourveau acknowledges the General Research Fund of the Hong Kong

Research Grants Council for financial support provided for this project (Project Number:

26503416) in the 2015/2016 funding round. This paper was previously circulated under the ti-

tle “Naughty Firms, Noisy Disclosure.” An online appendix to this paper can be downloaded at

http://research.chicagobooth.edu/arc/journal-of-accounting-research/online-supplements.

1In its report, the Organisation for Economic Co-operation and Development (OECD)

writes that “greater transparency in the market is generally efficiency enhancing and, as such,

welcome by competition agencies. However, it can also produce anticompetitive effects by

facilitating collusion or providing firms with focal points around which to align their behavior”

(OECD [2012]).

CORPORATE DISCLOSURE AS A TACIT COORDINATION MECHANISM 297

disclosure targeted at investors in order to coordinate actions in product

markets. As firms have imperfect information about rival behavior (Green

and Porter [1984]), the observability of each other’s past, current, and

expected future actions, expressed through public financial disclosure, can

help them stabilize the cartels. For instance, such disclosure can suggest

a collusive price and help monitor whether colluding peer firms have de-

viated from that price. Such publicly verifiable information is even more

important when there is no direct communication between firms, that is,

when firms are engaged in tacit collusion arrangements.2

Discerning between disclosure designed to facilitate collusion and disclo-

sure targeted at investors3is challenging, given that both product-market

and disclosure choices are likely to be endogenously determined. More-

over, it is difficult, if not impossible, to directly observe colluding firms.

For instance, comparing convicted and nonconvicted firms would not yield

conclusive evidence, as nonconvicted firms might be engaging in the most

profitable and stable cartels. Our identification strategy thus relies on ex-

ogenously varying incentives to tacitly collude. In particular, we investigate

a setting where antitrust authorities gain more power to detect price-fixing

activities. We argue that this leads to higher explicit collusion costs and,

for some firms, tacit collusion thus becomes a more profitable strategy

than explicit collusion. In other words, higher costs of private communica-

tion make public communication more appealing. This allows us to study

whether higher incentives to tacitly coordinate actions in product markets

push firms to start unilaterally providing more information on product-

market strategies in their financial disclosure documents.

We consider a sample of U.S. publicly listed companies from 1994 to

2012 and develop a measure meant to capture exogenous increase in ex-

plicit collusion costs at the industry level. Specifically, given the rise in the

prominence of international cartels and the focus of U.S. antitrust author-

ities on investigations involving non-U.S. conspirators (Ghosal and Sokol

[2014]), we rely on the passage of antitrust laws in the countries with which

the firm’s industry trades. In particular, we study leniency laws, which have

been passed or strengthened in a staggered manner around the world start-

ing in 1993. A leniency law allows the cartel member, who provides crucial

evidence to the cartel prosecutors, to obtain amnesty and thus reduce le-

gal exposure. Our analysis requires a measure of incentives to collude that

2In line with the earlier literature, we define explicit collusion as direct communication

between firms, which represents a violation of antitrust law. In contrast, tacit coordination

involves situations where firms do not communicate privately to exchange information. From

a legal perspective, tacit collusion cases are much harder to prosecute. For instance, in the

decision Text Messaging Antitrust Litigation (No 14-2301, April 9, 2015), Judge Richard Posner

stated that it is “difficult to prove illegal collusion without witnesses to an agreement” and that

circumstantialevidence“consistentwithaninferenceofcollusion,but[...]equallyconsistent

with independent parallel behavior” is not sufficient.

3For the sake of brevity, in the paper we refer to the disclosure targeted at investors as

financial disclosure.