Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures
Motivated by the FASB’s project about the disaggregation of performance information, we study a Korean rule change that allowed firms to withhold a previously mandated disaggregation of Cost of Sales (CoS). We find that after withholding, firms’ profitability increases by 7.8%. Our industry-focused results suggest that withholding affects profitability by reducing information flows between peer firms. We then document a range of evidence consistent with the idea that firms withhold disaggregating CoS to protect cost-innovations from rivals. First, we document efficiency gains following withholding of disaggregated CoS. Second, we construct a novel measure of firms’ cost innovative potential and show that it predicts withholding and subsequent profitability gains under the voluntary disclosure regime. Third, our survey-experiment of 1,257 US public firms’ managers shows that they would reduce investments in process/cost innovations if they were required to disaggregate CoS. Our study highlights to standard setters and academics that CoS disaggregation entails operational consequences for firms.
Competition, Cost innovation, Cost structure, Disaggregated cost disclosure, Performance, Performance dispersion, Proprietary costs, Voluntary disclosure