Proprietary costs: Why do R&D-active firms choose single-lender financing?

We examine whether proprietary costs drive R&D-active firms’ choice of private loan structure. We find that R&D-active firms are more likely to choose single-lender over multi-lender private loan financing. This is consistent with the theory that high-ability entrepreneurs protect their proprietary knowledge by communicating it to a single lender while disclosing generic and less sensitive information to the public. This propensity, however, significantly decreases after the enactment of the American Inventor’s Protection Act (AIPA), which accelerated public disclosure of firms’ patent details in filings with the US Patent and Trademark Office. This accelerated public disclosure potentially caused R&D information to spill over to rivals, increasing the proprietary costs of single-lender borrowers. AIPA enactment also increased the spread on R&D-active firms’ single-lender loans. These findings contribute to the voluntary disclosure and financing-choice literature by linking R&D-active firms’ choice of single-lender financing to the proprietary costs of public disclosure.

Voluntary Disclosure Responses to Mandated Disclosure: Evidence from Australian Corporate Tax Transparency

In order to deter aggressive tax planning, the Australian government mandated public disclosure of three line items from large corporations' tax returns. However, there is no evidence that the mandated disclosure led public firms to pay more taxes (Hoopes, Robinson, and Slemrod 2018). Instead, I find that firms strategically offset expected reputational costs by voluntarily issuing supplemental information. Specifically, when managers expect new reputational costs from the mandated tax return disclosure (wherein the disclosure reveals an unexpectedly low tax liability) and low proprietary costs from a supplemental voluntary disclosure (wherein the firm discloses its nonaggressive tax planning), firms are likely to voluntarily disclose information that both preempts and supplements the government's mandatory disclosure. Thus, when mandatory disclosures are incomplete, firms will voluntarily issue additional information to remain in control of their disclosure environments.

On Market Concentration and Disclosure

Verrecchia (1983,1990) introduced the proprietary cost hypothesis in which exogenous disclosure costs are a reduced-form interpretation of lost competitive advantage in product markets. We develop a micro-foundation for this disclosure cost in a Cournot game and explicitly derive the cost as a function of market structure. When the market is sufficiently competitive, this model has a reduced-form representation similar to a standard voluntary disclosure game with a partial disclosure equilibrium. Proprietary costs are increasing in the number of competitors, the degree of product substitution, overall uncertainty and production costs. The analysis also offers new empirical predictions on the interaction between disclosure choice, managerial horizon and entry.

Disclosure Regulation and Competitive Interactions: Evidence from the Oil and Gas Industry

We study the effects of mandatory disclosure on competitive interactions in the setting of oil & gas (O&G) reserve disclosures by North American public firms. We document that reserve disclosures inform competitors: when one firm announces larger increases in O&G reserves, competitors experience lower announcement returns and higher real investments. To sharpen identification, we analyze several sources of cross-sectional variation in these patterns, the degree of competition and the sign and the source of reserves changes. We also exploit two plausibly exogenous shocks: the tightening of the O&G reserve disclosure rules and the introduction of fracking technology. Additional tests more directly focused on the presence of proprietary costs confirm that the mandated reserve disclosures result in a relative loss of competitive edge for announcing firms. Our collective evidence highlights important trade-offs in the market-wide effects of disclosure regulation.

Proprietary Costs and the Reporting of Segment-level Tax Expense

We examine whether proprietary costs of disclosure affect the reporting of segment-level tax expense. Current accounting rules for segment-level reporting afford managers significantdiscretion in what line items to report. We predict and find firms with higher proprietary costs of disclosure (i.e., higher tax avoidance) are less likely to disclose segment-level tax information. These results are stronger for firms that define business segments on a geographic basis, where disclosure could reveal tax expense information about specific tax jurisdictions, consistent with the proprietary cost hypothesis. Overall, our results suggest some managers potentially use discretion in current guidance to avoid segment-level disclosure of taxes when these disclosures have the potential to be detrimental to the firm.

Product Market Peers in Lending

This study examines how product market peers affect lending relationships. We contend that firms are more likely to borrow from a bank that has previously lent to a peer to mitigate information asymmetry with the bank when potential information processing efficiencies are greater (i.e., information efficiency hypothesis), but there will be a decreased propensity to borrow from a shared lender when the costs of leaking proprietary information are greater (i.e., proprietary information leakage hypothesis). We find that, after bank mergers that involve peers’ lenders, firms are more likely to switch banks to avoid sharing the same lenders as a product market peer. In cross-sectional analyses, we find that after bank mergers that involve a peer’s bank, firms are less likely to switch when the firm’s financial reporting is more opaque and has greater monitoring needs, consistent with the information efficiency hypothesis. In contrast, firms are more likely to switch after bank mergers that involve a peer’s bank when the firm belongs to an industry with greater proprietary costs and when the bank has greater incentives to leak information, consistent with the proprietary cost hypothesis. This paper was accepted by Brian Bushee, accounting.

How Do Firms Change Investments Based on MD&A Disclosures of Peer Firms?

We show that a firm's one-year-ahead capital investments and inventory increase (decrease) when peer firms' MD&A narratives become more optimistic (pessimistic). This finding is driven by firms that access peer firms' 10-K filings within seven days of filing, and remains after controlling for other determinants of a firm's investments as well as economic connections between the firm and peer firms. Moreover, a firm's investment response varies based on content in peer firms' MD&A narratives. For instance, a firm makes more (less) capital investments when peer firms become more optimistic in their narratives that discuss the industry and investments (competition). Our findings provide broad insights on the information content and proprietary costs of MD&A disclosures.