It’s widely accepted that access to more information about companies enables investors to make better decisions on buying and selling stocks. That’s one good reason securities regulators around the world require publicly traded businesses to make all kinds of disclosures.
But divulging too much information can actually hurt profits, productivity, and innovation, according to Chicago Booth’s Philip G. Berger, along with Stanford’s Jung Ho Choi and Southern Methodist University’s Sorabh Tomar (both graduates of Booth’s PhD Program). They studied what happened when South Korean regulators scaled back reporting requirements related to the biggest expense item in corporate income statements, cost of sales (CoS). The results suggest that not having to report as much detail gave companies an added incentive to innovate, knowing that competitors couldn’t simply read the financial statements and copy cost-side innovations. Productivity and profits rose for businesses that divulged less, according to the study.
The findings may give pause to regulators including the United States’ Financial Accounting Standards Board and the International Accounting Standards Board, which have been pushing to require publicly traded enterprises to break out—or disaggregate—more information about operating expenses.
“Our results should be of interest to these standard setters,” Berger says. “Although their objective of ‘decision usefulness’ is couched in terms of investors, we illustrate that firms themselves use disaggregated CoS information to keep up with competitors.” Not having to divulge such data “helps firms protect and cultivate cost innovations,” the researchers write.
Until 2003, South Korea’s Financial Services Commission required publicly traded companies to report details about raw material, labor, and overhead costs. The commission made those disclosures optional starting in 2004. The regulator argued that the required reporting contained proprietary information and could place an excessive legal burden on public companies, the researchers write.
In their study, they analyzed the operational consequences for Korean companies that voluntarily continued reporting the information compared with those that didn’t. They gathered data from the annual reports of companies traded on the Korean Stock Exchange and the Korean Securities Dealers Automated Quotations system from the period when cost disaggregation was mandatory and from the later period when such disaggregation became voluntary.