Public Firm Presence, Financial Reporting, and the Decline of U.S. Manufacturing

• Published date: 01 June 2022
• Author: STEPHEN GLAESER,JAMES D. OMARTIAN
• Date: 01 June 2022
• DOI: http://doi.org/10.1111/1475-679X.12411

DOI: 10.1111/1475-679X.12411

Journal of Accounting Research

Vol. 60 No. 3 June 2022

Printed in U.S.A.

Public Firm Presence, Financial

Reporting, and the Decline of U.S.

Manufacturing

STEPHEN GLAESER∗AND JAMES D. OMARTIAN†

Received 2 December 2019; accepted 11 August 2021

ABSTRACT

We examine the relation between public firm presence and import competi-

tion. The information created by public firm presence may provide importers

with insights they can use for competing with domestic firms. Consistent with

this possibility, we document a positive relation between public firm presence

and import competition. We find similar results when using differences in

the expected costs of the Sarbanes-Oxley Act as a source of plausibly exoge-

nous variation in public firm presence after the act. We use differences in the

proportion of German firms reporting publicly around a major enforcement

reform as a natural mechanism experiment, and find evidence that financial

reporting is a channel through which public firm presence relates to import

competition. Additional mechanism tests and a falsification test estimated in

the United Kingdom, where public and most private firms report publicly,

∗Kenan Flagler Business School, University of North Carolina at Chapel Hill; †Ross School

of Business, University of Michigan.

Accepted by Rodrigo Verdi.We additionally thank an anonymous referee, Chris Armstrong,

Phil Berger (discussant), Matthias Breuer,Bob Holthausen, Raffi Indjejikian, Junyoung Jeong,

Zach Kaplan, Eva Labro, Mark Lang, Greg Miller, Gans Narayanamoorthy (discussant), Mar-

cel Olbert, Nemit Shroff, DJ Stockbridge, and Gwen Yu for helpful comments and suggestions.

We also thank participants at the 30th Annual Conference on Financial Economics and Ac-

counting, the 32nd Accounting Research Conference in Memory of Nicholas Dopuch, and

the Columbia Junior Accounting Faculty Conference, along with workshop participants at

the Massachusetts Institute of Technology, the University of Michigan, and the University of

Rochester for useful feedback. An online appendix to this paper can be downloaded at http:

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

1085

© 2021 The Chookaszian Accounting Research Center at the University of Chicago Booth School of

Business.

1086 s. glaeser and j. d. omartian

further support this inference. In total, our evidence is consistent with foreign

competitors using the information created by public firm presence, includ-

ing what public firms disclose in financial reports, to compete with domestic

firms. Consequently, our results provide evidence of competitors using the

proprietary information disclosed in financial reports to compete with the

disclosing firms and of information frictions affecting trade.

JEL codes: F14, F16, G18, G38, L60, M41

Keywords: competition; trade; private firms; public firms; financial report-

ing; proprietary costs; disclosure externalities

1. Introduction

We examine whether the information generated by the presence of publicly

traded manufacturing firms facilitates foreign import competition in the

United States. Although foreign importers enjoy many trade advantages,

such as lower labor costs and a lighter regulatory burden, they also face

significant information frictions. Potential frictions include uncertainty

about demand, consumer preferences, and the competitive landscape, all

of which may increase the riskiness of competing in the U.S. market and dis-

courage foreign imports. Publicly traded firms are one information source

that may ameliorate these frictions.

The U.S. Securities and Exchange Commission (SEC) requires firms pub-

licly traded in U.S. capital markets to prepare financial reports for capital

market participants. These reports must detail firms’ investments, finan-

cial performance, exposure to risk factors, material contracts, expansion

plans, and production schedules. Beyond these mandated disclosures, the

managers of public firms also often release forecasts of future earnings

and financial decisions and discuss firm performance with analysts, who

in turn produce their own forecasts. Although investors are the intended

beneficiaries of much of this information, competitors can also use it

(Badertscher, Shroff, and White [2013], Kim [2019], Bernard, Blackburne,

and Thornock [2020]). For example, foreign importers can draw on in-

formation about production schedules, investments, profitability, accruals,

sales, and risk factors to understand U.S. market demand and consumer

preferences, as well as the U.S. competitive landscape. This information

can thus reduce foreign firms’ uncertainty about the U.S. market.

Prior work finds that reduced uncertainty increases investment on aver-

age, suggesting that reduced uncertainty can also increase importing on

the margin (e.g., Guiso and Parigi [1999]). Because the information gen-

erated by the presence of public firms can also reveal domestic firms’ oper-

ational strengths and weaknesses, such as financial health and competitive

capabilities, it can ameliorate information frictions and encourage import

competition even when the public firms’ profitability is low. Despite these

arguments, public firm presence could also decrease import competition

or have no effect on it, because the information produced also benefits

decline of u.s. manufacturing 1087

domestic firms (Badertscher, Shroff, and White [2013]). For example, the

information produced as a result of public firm presence may be more

relevant to and accessible by domestic firms. If this factor outweighs any

benefits of ameliorating importers’ more severe information frictions, then

public firm presence will benefit domestic firms to a greater degree, de-

creasing import competition. Moreover, public firm presence could even

discourage importers insofar as public firms are superior competitors be-

cause of their greater access to liquid capital, their responsiveness to invest-

ment opportunities, and their ability to invest in projects designed to help

them deter competition (e.g., greater information about domestic firms’

strengths could deter import competition).1Consequently, the relation be-

tween public firm presence and import competition is an open question.

We employ several approaches in investigating the relation between pub-

lic firm presence and import competition. We begin by descriptively docu-

menting whether variables that we expect to affect import competition are

also determinants of public firm presence (defined for each industry-year

as the ratio of public firm sales to total U.S. production). We find that pub-

lic firm presence is greater in industries with greater economies of scale,

a higher concentration, and higher imports in other high-income coun-

tries. We also find that public firm presence increases in industries that are

growing and are becoming more labor intensive.

We next examine the relation between public firm presence and for-

eign import competition using industry-level panel regressions of import

competition. In these regressions, we control for the variables included

in our determinants analysis. We measure import competition as the ratio

of nonrelated party imports to domestic production, and we regress this

measure on lagged public firm presence. The results from our preferred

specification suggest that moving from the median to the 75th percentile of

public firm presence within an industry increases subsequent import com-

petition in that industry by about 1.3 percentage points. For comparison,

the elasticity of subsequent import competition to public firm presence is

slightly smaller than the elasticity of import competition to the domestic

production worker wage rate, one-third of the elasticity to tariff uncertainty

resolution calculated as in Pierce and Schott [2016], and 1/20th of the elas-

ticity to value added. In total, we find evidence of a robust, albeit second-

order, association between public firm presence and subsequent import

competition.

Although the association between public firm presence and import

competition is consistent with a causal link, other reasonable explanations

for it may exist. For example, our determinants analysis suggests that in-

dustry growth is a determinant of public firm presence and may encourage

importing. Consequently, growth options revealed via a mechanism other

1For example, Rajan and Zingales [1998], Aghion et al. [2005], Michaely and Roberts

[2011], Badertscher et al. [2013], Maksimovic et al. [2013], Gilje and Taillard[2016], Achar ya

and Xu [2017], and Aghion et al. [2018].