Facilitating Tacit Collusion Through Voluntary Disclosure: Evidence from Common Ownership

• Published date: 01 December 2022
• Author: ANDREA PAWLICZEK,A. NICOLE SKINNER,SARAH L. C. ZECHMAN
• Date: 01 December 2022
• DOI: http://doi.org/10.1111/1475-679X.12452

DOI: 10.1111/1475-679X.12452

Journal of Accounting Research

Vol. 60 No. 5 December 2022

Printed in U.S.A.

Facilitating Tacit Collusion Through

Voluntary Disclosure: Evidence

from Common Ownership

ANDREA PAWLICZEK ,∗A. NICOLE SKINNER ,†

AND SARAH L. C. ZECHMAN ∗

Received 8 June 2018; accepted 3 January 2022

ABSTRACT

We examine whether voluntary disclosure is associated with incentives for

firms to collude. Public disclosure can facilitate collusion by aiding with coor-

dination and monitoring for defections. Using common ownership (investors

holding stock in competing firms) to identify reduced incentives to compete,

we find a positive association between public disclosure and these incentives.

We also find that common ownership is positively associated with measures

of disclosure that are likely to facilitate tacit collusion and that this associa-

tion is stronger in industries where collusion is easier. Our study expands the

literature on disclosure and competition among firms by showing that pub-

lic disclosure is positively associated with incentives for tacit collusion. This

∗University of Colorado; †University of Georgia

Accepted by Christian Leuz. This paper is based on “Common Ownership and Voluntary

Disclosure” by Pawliczek and Skinner.The authors would like to thank Leah Baer, John Camp-

bell, Yonca Ertimur, Nathan Marshall, Jonathan Rogers, Andy Stephan, and Hal White for

their insights and comments. We also thank participants at the Colorado Accounting Research

Symposium 2017, the 2018 AAA Annual Meeting, and the University of Colorado for helpful

comments and suggestions. An online appendix to this paper can be downloaded at http:

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

Andrea.Pawliczek@colorado.edu

1651

© 2022 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1652 a. pawliczek, a. n. skinner, and s. l. c. zechman

finding is consistent with managers facilitating anticompetitive outcomes us-

ing voluntary disclosure.

JEL codes: D22, G34, L11, L41, L44, M40, M41

Keywords: disclosure; tacit collusion; common ownership; competition; an-

ticompetitive effects

1. Introduction

This study is motivated by the question of whether public disclosure can

facilitate anticompetitive activities. A recent Organization for Economic Co-

operation and Development (OECD) roundtable expressed concern that

corporate transparency can “facilitate the attainment of collusive equilibria

among competitors or result in noncoordinated anticompetitive effects”

(OECD [2010]). In this study, we investigate whether voluntary disclosure

is associated with incentives for firms to collude.

Our proxy for reduced incentives to compete is common ownership

(investors holding stock in competing firms). Although a number of stud-

ies suggest that common ownership reduces competitive incentives, there

is little evidence about how this might occur (e.g., Azar, Schmalz, and Tecu

[2018], Kini, Lee, and Shen [2021]). We predict that public disclosure can

facilitate these outcomes. This is a joint test of two tenuous findings in the

literature—that common ownership provides firms incentives for anticom-

petitive actions and that firms can use disclosure to facilitate these actions.

Although studies provide some evidence for both assertions independently,

tension remains, in part due to mixed results.

A number of studies suggest that common owners reduce competi-

tion (e.g., Azar [2017], Azar, Schmalz, and Tecu [2018], Azar, Raina, and

Schmalz [2022]), although several recent studies have questioned these

conclusions.1Schmalz [2018] lays out three possible mechanisms that

could facilitate the anticompetitive outcomes, noting the paucity of re-

search examining each. First, common owners could influence managers

to act unilaterally in the common owners’ interest using incentives (e.g.,

compensation), threat of exit (e.g., selling shares), or voice (e.g., discus-

sions with management). Second, managers of commonly owned firms

could coordinate and explicitly collude. Third, with sufficient coordination

and monitoring, managers of commonly owned firms could tacitly collude.2

We explore this third mechanism and predict that (1) common ownership

1Recent studies question this conclusion based on the theoretical underpinnings

(e.g., Hemphill and Kahan [2019]) and research design (e.g., Dennis et al. [2021], Lewellen

and Lowry [2021]). We outline these issues and discuss how our study mitigates them in sub-

section 3.2.1.

2Similar to Rogers et al. [2016], we define tacit collusion as firms limiting their competition

with one another without explicit agreement. Per Ivaldi et al. [2003]: “‘Tacit collusion’ need

not involve any ‘collusion’ in the legal sense, and in particular need involve no communication

between the parties. It is referred to as tacit collusion only because the outcome … may well

facilitating tacit collusion through voluntary disclosure 1653

encourages tacit collusion and (2) public disclosure can facilitate collusion.

Underlying this prediction are the expectations that disclosure helps firms

establish focal points around which to coordinate and monitor defections.

The use of private communication to coordinate among firms is illegal, but

public disclosure provides a legal alternative (Bourveau, She, and Zaldokas

[2020]).

Our analyses examine the relation between common ownership and dis-

closure, followed by an evaluation of three alternative explanations for our

findings. We use three proxies for common ownership based on the pro-

portion of an industry with which the firm is connected via ownership. The

first is the percentage of ownership a firm has in common with other firms

in its industry. The second is the percentage of industry firms with which

the firm shares a blockholder (i.e., limited to institutions holding greater

than 5% in each firm). The third is the percentage of industry equity

(excluding the firm) owned by the firm’s top five owners, based on Anton

et al. [2021b 2021a.].

We include four proxies for the type of disclosure we expect to facil-

itate the coordination and monitoring necessary for tacit collusion. Our

first three proxies measure disclosures that can aid in coordination. First,

we include a measure of sales guidance from the earnings announcement

(RevenueGuidance) to proxy for disclosures facilitating coordination around

price or quantity. Second, we include a measure of discussion about cus-

tomers in the earnings conference call (CustomerWords) to proxy for dis-

closures facilitating coordination around market segmentation. Third, we

include whether a firm issues a management forecast, as this should ap-

ply to many firms, circumstances, and potential focal points (e.g., market

segments, price, and quantity) (FC_Indicator).

Our final proxy is an indicator equal to 1 if a firm does not redact infor-

mation in its SEC filings (NoCTO). The motivation is that the information

likely to be redacted is also likely to be useful in finding a focal point around

which to collude or in monitoring coordination. However, as not all firms

have material contracts that must be filed with the SEC or have the type

of information that might be redacted, we expect this to be a weak proxy

(Verrecchia and Weber [2006]). Nonetheless, we include this measure in

our tests following Bourveau, She, and Zaldokas [2020].

All four disclosure measures are positively associated with at least one

common ownership proxy, if not all three (8 of 12 specifications have sta-

tistical significance). This finding is consistent with managers using public

disclosure to facilitate tacit collusion among firms with higher common

ownership.

If public disclosure facilitates tacit collusion, we expect the common

ownership–disclosure relation to be stronger in industries with fewer firms.

resemble that of explicit collusion or even of an official cartel. A better term from a legal

perspective might be ‘tacit coordination’.”