Do Competitors' Financial Constraints Affect Corporate Disclosure

Do Competitors’ Financial Constraints Affect Corporate Disclosure?
Zeyang Ju
The Australian National University
zeyang.ju@anu.edu.au
Lingwei Li
lingwei.li@anu.edu.au
Hai Wu*
steven.wu@anu.edu.au
April 2020
*
Corresponding author, tel: +61-2-61253586; Address: Research School of Accounting, PAP Moran Bld 21,
Australian National University, Acton, ACT 2601, Australia.
Do Competitors’ Financial Constraints Affect Corporate Disclosure?
Abstract
In making corporate disclosure decisions, managers trade off capital market benefits of
disclosure against product market costs of disclosure. We document a positive relation between
competitors’ financial constraints and various measures of corporate disclosure, including
customer-information disclosure, management earnings forecasts, 8-K filings, and firm-
initiated press releases. This is consistent with high financial constraints inhibiting competitors’
abilities to use a disclosing firm’s information to compete in the product market, which lower
the proprietary costs of disclosure for the disclosing firm. This positive relation is more
pronounced for the focal firms with lower financial constraints, with higher institutional
ownership, and in the pre-Reg FD period. The results are robust to using the American Jobs
Creation Act of 2004 as an exogenous shock to competitors’ financial constraints. Management
also discusses competition less in 10-K filings when rivals exhibit high financial constraints.
The positive relations between rivals’ financial constraints and the readability and length of
10-K filings further corroborate our findings. Overall, the empirical evidence suggests that
competitors’ financial capacity to use disclosed proprietary information is an important
determinant of corporate disclosure.
Keywords: Competitors’ financial constraints; corporate disclosure; proprietary costs of

disclosure; customer-information disclosure; management earnings forecasts; 8-K filings;
firm-initiated press releases.
JEL classification: D82; G30; L1; M41.
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1. Introduction
Managers have incentives to fully disclose information to the capital market players in
order to reduce information asymmetry and adverse selection, leading to lower cost of capital
(Grossman, 1981; Milgrom, 1981; Milgrom and Roberts, 1986). However, proprietary costs of
disclosure, which negatively affect a firm’s competitive position in the product market, are
hypothesized to prevent full disclosure (Verrecchia, 1983; Dye, 1986). In a survey of CFOs of
U.S. companies, Graham, Harvey and Rajgopal (2005, p.62) report that “nearly three-fifths of
survey respondents agree or strongly agree that giving away company secrets is an important
barrier to more voluntary disclosure.”
Theory on corporate disclosure often considers disclosure choices as a trade-off between
capital market benefits of disclosure and the proprietary costs of competing firms exploiting
disclosure (Darrough and Stoughton, 1990; Feltham, Gigler, and Hughes, 1992; Hayes and
Lundholm, 1996; Hughes, Kao and Williams, 2002). To derive an equilibrium level of
disclosure, prior studies often model competitors’ responses to the disclosed information in the
product market as the key determinant of firms’ proprietary cost of disclosure. 1 A crucial
question for a disclosing firm’s managers in estimating the proprietary cost of disclosure is
whether competitors have rich resources to efficiently react to the firm’s disclosed information
in the product market. Empirical studies, in an attempt to capture proprietary costs of
disclosure, rarely measure factors influencing rivals’ ability to exploit disclosure of a focal
firm. In this research, we fill this void by examining whether a firm’s voluntary disclosure is
1
Bhattacharya and Ritter (1983) consider the reaction of rivals to a firm’s disclosure of innovation-related
information, which may hurt the disclosing firm’s likelihood of winning the innovation race. In a study of
corporate disclosure in an entry game, Darrough and Stoughton (1990) incorporate potential rivals’ reaction to
corporate news in the form of the probability of new entrants to enter the market. Hayes and Lundholm (1996)
analyze firms’ segment disclosure in the presence of a competitor. They specifically state, “In this paper we
consider how firms choose the appropriate level of aggregation in segmental disclosures, given that such
disclosures are observed by both competitors and the capital market. The decision involves trading off the benefits
of informing the capital market about firm value against the costs of aiding the rival” (p.261). We note that for
rivals to adequately react to firms’ disclosure, rivals need to spend significant resources on innovation, market
entry and investment in specific segment.
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affected by its competitors’ financial constraints.
Prior literature provides strong evidence that constraints on financial resources
negatively affect firms’ ability to invest, innovate, and compete in the product market (Whited,
1992; Alti, 2003; Almeida and Campello, 2007; Leary and Roberts, 2014; Grieser and Liu,
2019). Therefore, we expect that when a firm’s managers observe competing firms with a
higher level of financial constraints, they will perceive lower proprietary costs of disclosure
and increase the disclosure level. To test our prediction, we adopt a research design similar to
that of Grieser and Liu (2019), who examine the effect of rival firms’ financial constraints on
corporate innovations. Specifically, we regress measures of corporate disclosure on lagged
competitors’ financial constraints. We employ a text-based measure to identify time-variant
product market competitors of a focal firm (Hoberg and Phillips, 2016) and calculate a
composite measure of average competitors’ financial constraints using the Size–Age (SA)
index (Hadlock and Pierce, 2010), the Whited–Wu (WW) index (Whited and Wu, 2006), and
the Delay index (Hoberg and Maksimovic, 2015). To capture corporate disclosure practices,
we follow prior studies (Ali, Klasa and Yeung, 2014; Guay, Samuels and Taylor, 2016) to
examine various types of voluntary disclosure, including disclosure of customer-related
information, management earnings forecasts, 8-K filings, and firm-initiated press releases.
We find that competitors’ financial constraints are negatively associated with the
percentage of unidentified customers in a disclosing firm’s segment reporting and the
percentage of sales attributable to unidentified customers. Competitors’ financial constraints
are also positively associated with the annual frequency of management earnings forecasts, 8-
K filings, and firm-initiated press releases. These results are in line with our prediction that a
disclosing firm will reveal more information when competitors are more financially
constrained.
To address endogeneity concerns, we follow Grieser and Liu (2019) and use the
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American Jobs Creation Act of 2004 (AJCA) as an exogenous shock to the financial constraints
of rivals earning significant foreign incomes. Employing a difference-in-differences design, we
find that, after the AJCA relaxed the financial constraints of competitors with significant
foreign income, treated firms (whose competitors were likely to repatriate a greater amount of
foreign income) 2 decreased disclosure levels relative to control firms (whose competitors’
financial constraints are less affected by the AJCA). Further, treated firms with highly
constrained competitors before the enactment of the AJCA decreased customer-information
disclosure to a greater extent. This analysis supports a causal relationship between competitors’
financial constraints and firms’ corporate disclosure. We further show that our results are
robust to using the three individual measures of competitors’ financial constraints (the SA
index, the WW index, and the Delay index), controlling for competitors’ other characteristics,
and controlling for industry-year fixed effects to account for unobserved time-variant industry
characteristics.
We next perform cross-sectional tests to explore the types of firms whose disclosure
practices are more likely to be affected by competitors’ financial constraints. We find that the
positive relation between competitors’ financial constraints and disclosing firms’ disclosure
levels is more pronounced for disclosing firms with lower financial constraints and with higher
institutional ownership. This suggests that firms are more responsive to competitor constraints
when facing low potential predation risks in the product market or high potential disclosure
benefits in the capital market. Further, we examine whether disclosure-related regulations
affect the relation between corporate disclosure and product market competition. We show that
the relation between competitors’ financial constraints and corporate disclosure is stronger in
the pre-Regulation Fair Disclosure (pre-Reg FD) period than the post-Regulation Fair
Disclosure (post-Reg FD) period. This is consistent with an overall improvement in the
2
Following Grieser and Liu (2019), we require treated firms to be not affected by the AJCA.
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corporate disclosure level after the adoption of Reg FD and other subsequent regulatory
changes.
To further corroborate our findings, we show that competitors’ financial constraints are
negatively associated with management’s discussion of competitive environment in 10-K
fillings of the focal firm. This supports our argument that managers perceive the intensity of
product market competition to be lower when facing constrained rivals. This reduces the
proprietary cost of disclosure, motivating higher level of disclosure. Finally, we examine the
effect of competitors’ financial constraints on the readability and length of focal firms’ 10-K
filings, which are characteristics of mandatory disclosure. We find that focal firms’ 10-K filings
tend to be more readable and longer in length in the presence of competitors’ financial
constraints. Sentences in 10-K filings are also shorter when competitors experience high
financial constraints. Overall, these analyses indicate that managers improve the readability of
mandatory financial reports and provide more information in these reports when they perceive
low proprietary costs of disclosure from observing financially constrained rivals.
This study makes three contributions. First, we extend the literature on the proprietary
costs of disclosure. Prior studies measure product-market-related proprietary costs of
disclosure using industry-level characteristics (e.g., Bamber and Cheon, 1998; Harris, 1998;
Botosan and Stanford, 2005; Verrecchia and Weber, 2006; Li, 2010; Ali et al., 2014), corporate
predation risks (Bernard, 2016), tariff reduction (Huang, Jennings and Yu, 2017), trade secrecy
(Glaeser, 2018), and legal restrictions on employees (Li, Lin and Zhang, 2018, Aobdia, 2018).
In contrast to prior studies, we focus on competitors’ characteristics that influence their abilities
to take advantage of a focal firm’s proprietary information. Prior theoretical works on
proprietary costs of disclosure typically model managers’ disclosure decisions after
considering rivals’ reaction to the disclosed information (Darrough and Stoughton, 1990;
Feltham et al., 1992; Hayes and Lundholm, 1996). Our results are consistent with managers
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considering competitors’ financial constraints as a useful indicator in assessing rivals’ potential
reactions to disclosed information in the product market. We also explore exogenous changes
to competitors’ financial constraints to build a causal link between product market competition
and corporate disclosure policy. Thus, our study addresses a major concern of prior literature
on the endogeneity issues associated with investigating the proprietary costs of disclosure
(Lang and Sul, 2014; Huang et al., 2017; Li et al., 2018).
Second, we contribute to the literature on product market competition and corporate
disclosure by adopting a measure of time-variant competitive pressure on a focal firm. Our
measure comprises two key sources of time-dependent variation. First, by using the text-based
approach to identify firms’ competitors (Hoberg and Phillips, 2016), our measure explores
changes in disclosing firms’ competitor networks over time. Second, our measure captures
individual competitors’ time-variant ability to use disclosed information. Prior literature seeks
to move beyond a static measure of industry characteristics by utilizing regulatory changes
such as disclosure regulation (Bernard, 2016), trade secrets law (Li et al., 2018) and
enforcement of noncompete agreements (Aobdia, 2018). Our approach instead focuses on
changes in the composition of product market rivals and their financial conditions. We provide
evidence on the general dynamic relationship between product market competition and
corporate disclosure.
Third, prior literature examines how a firm formulates investing, pricing, costing, and
financing strategies in the presence of more constrained rivals (Borenstein and Rose, 1995;
Chevalier, 1995; Genesove and Mullin, 2001; Rauh, 2006; Cookson, Dusheiko, Hardman and
Martin, 2010; Grieser and Liu, 2019). We provide evidence that firms change disclosure levels
in response to competitors’ more adverse financial conditions. Thus, this study extends this
literature by examining how rivals’ financial conditions affect firms’ disclosure policies.
The remainder of the paper proceeds as follows. Section 2 reviews the related literature
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and develops the hypothesis. Section 3 describes our research design. Section 4 describes the
sample. Section 5 presents the baseline results and robustness checks. Section 6 reports the
results for additional tests. Section 7 concludes the paper.
2. Related Literature and Hypothesis Development
2.1 Product Market Competition and Corporate Disclosure
Early disclosure theory shows that, in the absence of any disclosure costs, an adverse
selection problem motivates managers to fully disclose (e.g., Grossman, 1981; Milgrom, 1981;
Dye, 1985; Milgrom and Roberts, 1986). Highlighting product market competition as an
important source of proprietary costs of disclosure, Verrecchia (1983) predicts that the market
players will grant firms more discretion in their disclosure choices when they have higher
proprietary costs of disclosure. In such cases, managers can afford to disclose less. Dye (1986)
further confirms that, when managers have proprietary and non-proprietary information, partial
disclosure should be optimal. Prior theoretical studies typically assume that, when making
disclosure decisions, managers take into account rivals’ reactions to disclosure of proprietary
information in the product market (Darrough and Stoughton, 1990; Feltham et al., 1992;
Feltham and Xie, 1992; Darrough, 1993; Hayes and Lundholm, 1996).
Prior empirical studies provide mixed results on the effect of product market competition
as proxied by industry concentration on segment disclosure (Harris, 1998; Botosan and Harris,
2000; Botosan and Stanford, 2005; Berger and Hann, 2007; Bens, Berger and Monahan, 2011)
and management earnings forecasts (Bamber and Cheon, 1998; Rogers and Stocken, 2005; Li,
2010; Ali et al., 2014). This could be the significant shortfalls of industry-level proxies for
product market competition. Raith (2003, p.1430) argues that “concentration indices alone are
poor measures of competition unless it is clear what causes their variation: when markets vary
in size or entry costs, less concentrated markets will tend to be more competitive. In contrast,
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if markets vary in product substitutability or other dimensions of the toughness of competition,
high levels of concentration are indicative of intense competition, not a lack of it.”
Recent studies seek to move beyond using industry-level competition proxies. For
instance, Bernard (2016) provides evidence consistent with high product market predation risks
motivating financially constrained firms to withhold disclosure of financial statements. Huang
et al. (2017) use reductions in import tariff rates to identify an exogenous increase in product
market competition and find that managers react to it by issuing fewer management forecasts.
Glaeser (2018) uses the staggered enactment of the Uniform Trade Secrets Act as a shock to
trade secrecy and finds that trade secrecy has a negative effect on voluntary disclosure. Li et
al. (2018) find that, after the adoption of the inevitable disclosure doctrines, which restricts
competitors’ access to confidential information, firms reduce disclosure of customer identity
information. Aobdia (2018) finds that a state’s enforcement of noncompete agreements
negatively affect disclosure of firms headquartered in that state. Cao, Ma, Tucker and Wan
(2018) find a negative relationship between technological peer pressure and product disclosure.
While prior literature examines the effect of industry structure, disclosing firms’ own
characteristics, and external shocks to proprietary costs of disclosure on corporate disclosure,
relatively little attention has been given to how disclosure policies are shaped by time-varying
competitors’ characteristics. This study takes this direction and examines whether and how
firms’ disclosure is affected by competitors’ ability to react to disclosed information, as
influenced by competitors’ financial capacity.
2.2 Financial Constraints and Product Market Competition
It is widely documented that financial constraints damage firms’ position in the product
market through restricting corporate investments. Whited (1992) shows that a firm’s financial
constraints adversely affect its competitive advantage by limiting real investment expenditures.
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Alti (2003) finds that financial constraints such as absent cash flows discourage a firm’s
investment spending, decreasing its competitive advantage. Savignac (2008) finds a negative
effect of financial constraints on the likelihood of firms engaging in innovative activities.
Existing evidence shows that firms pay specific attention to rivals’ financial conditions
when making real decisions relating to pricing and investment. Facing financially constrained
rivals, a firm takes predatory pricing choices (i.e., reducing its product prices) to drive
competitors out of the product market (Bolton and Scharfstein, 1990). Borenstein and Rose
(1995) show that, in the airline industry, firms with rich resources reduce flight prices to drive
out constrained rivals. Genesove and Mullin (2001) study firms’ predation in the sugar industry
and find that less constrained firms try to block potentially constrained entrants by reducing
sugar prices below the costs. Rauh (2006) finds that less constrained firms increase capital
expenditures when their competitors with pension plans are not expected to pay the required
contributions. Grieser and Liu (2019) find that, when competitors experience funding
difficulties, a firm increases R&D investment spending and shifts investment composition to
compete more aggressively.
Some studies provide evidence that firms make specific financing decisions when rivals
have binding constraints. Fresard (2010) finds that a firm tends to hold a greater amount of
cash reserves to capture more market shares from constrained competitors. Both Haushalter,
Klasa and Maxwell (2007) and Hoberg, Phillips and Prabhala (2014) report that a firm is more
likely to pay lower dividends and increase cash holdings when competitors are more financially
constrained. Overall, prior studies provide consistent evidence that managers are sensitive to
rivals’ financial conditions when making various corporate decisions. We extend this literature
to consider corporate disclosure decisions.
2.3 Hypothesis Development
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Prior theoretical works predict that proprietary costs of disclosure are higher when
competitors are more likely to use disclosed proprietary information to benefit them in the
product market (Darrough and Stoughton, 1990; Feltham et al., 1992; Feltham and Xie, 1992;
Darrough, 1993; Hayes and Lundholm, 1996). We argue that financial constraints could limit
rivals’ investing activities (Whited, 1992; Alti, 2003; Almeida and Campello, 2007), adversely
affecting their abilities to effectively react to disclosing firms’ information in the product
market.
Managers in disclosing firms closely monitor competing firms’ financial conditions
(Haushalter et al., 2007; Hoberg et al., 2014; Grieser and Liu, 2019) and recognize that high
levels of rival firms’ financial constraints effectively reduce competitors’ ability to exploit such
disclosure, which reduces the marginal proprietary costs of disclosure. When proprietary costs
of disclosure are lower, a firm is likely to disclose more because corporate disclosure aids in
reducing capital market information asymmetry, which can increase the firm’s stock liquidity
and decrease the cost of capital (Diamond and Verrecchia, 1991; Lang and Lundholm, 1996;
Easley and O’Hara, 2004; Baginski and Rakow, 2012). Thus, this study predicts that a firm
should disclose more when its competitors are restricted from using such information because
of relatively higher financial constraints.
Admittedly, some factors might mitigate the positive association between competitors’
financial constraints and the levels of corporate disclosure. First, Graham et al. (2005) provide
survey evidence that managers try to avoid setting disclosure precedents that will be difficult
to maintain. This suggests high stickiness in corporate disclosure practices, which might
maintain a low level of disclosure even if managers observe a decrease in proprietary costs.
Second, competitors’ high financial constraints could be temporary. This raises the concern
that once competitors’ financial health recovers, they can continue to increase competitive
pressure on the focal firm by using its past disclosure. The focal firm might still perceive
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relatively high proprietary costs of disclosure and therefore not disclose more. Despite the
existence of potential mitigating effects, we state our hypothesis as follows:
Hypothesis: Ceteris paribus, competitors’ financial constraints are positively associated with
focal firms’ disclosure levels.
3. Research Design
3.1 Measures of Corporate Disclosure
This study predicts a positive association between competitors’ financial constraints and
a firm’s disclosure level. Firms use various channels to disclose information to the public, such
as lodging periodic financial reports, issuing management earnings forecasts, and releasing
relevant information in a timely manner. Given the multidimensional feature of corporate
disclosure, we follow prior studies (Ali et al., 2014; Guay et al., 2016) to use multiple measures
of corporate voluntary disclosure. Specifically, in our main analysis, we measure a firm’s
disclosure level (Dis) using (1) the nondisclosure of customer identity information (NCD1 and
NCD2), (2) the frequency of management earnings forecasts (MEF), (3) the frequency of 8-K
disclosure (8K), and (4) the frequency of firm-initiated press releases (PR). In additional
analysis, we extends the empirical enquiry to study properties of firms’ mandatory disclosure.
3.1.1 Nondisclosure of Customer Identity Information
In the segment reporting, many firms show substantial sales to customers without
disclosing customer names (Ellis, Fee and Thomas, 2012). Li et al. (2018) argue that the
enforcement of Regulation S-K, which mandates disclosure of customer sales and identities, is
relatively weak, making such disclosure largely voluntary. Given that firms compete for
customers in the product market, customer-related information is useful to rival firms.
Consistenting Li et al. (2018), we construct two measures of nondisclosure of customer
information. 𝑁𝐶𝐷 ,, is the ratio of the number of customers without identified names to the
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total number of customers in focal firm i’s segment reporting during fiscal year t. 𝑁𝐶𝐷 ,, is
the proportion of sales attributable to unidentifiable customers.
3.1.2 Management Earnings Forecasts
Management earnings forecasts are voluntary disclosures of forward-looking
information about firms’ performance (Hirst, Koonce and Venkataraman, 2008). Management
earnings forecasts can help competitors estimate disclosing firms’ performance and adjust their
product prices and quantities (Lang and Sul, 2014). We define 𝑀𝐸𝐹 , as the number of
management earnings forecasts issued by firm i during fiscal year t. When managers of a focal
firm do not make earnings forecast during a fiscal year, 𝑀𝐸𝐹 , is set to zero.
3.1.3 Corporate 8-K Filings
Firms are required by the Securities and Exchange Commission (SEC) to file 8-K forms
to announce major events affecting shareholders. Although the SEC defines reportable events,
the guidelines are generic and significant amounts of 8-K filings are subject to managers’
discretion (Guay et al., 2016). The events disclosed in 8-K forms cover information that signals
a firm’s future operating performance (Noh, So and Weber, 2019; McMullin, Miller and Twedt,
2019). Proprietary information contained in 8-K filings, such as termination or initiation of
material sales contracts, can potentially help competitors in evaluating disclosing firms’ key
contracting counterparties and future performance. We define 8𝐾 , as the number of 8-K forms
that a focal firm i files with SEC during fiscal year t.
3.1.4 Firm-initiated Press Releases
Firm-initiated press releases contain factual business information (e.g., business
expansion plans, new product releases, and marketing campaigns). This type of disclosure is
timely and covers a wide range of information, which reduces information asymmetry between
the disclosing firm and capital market participants (Nichols and Wieland, 2009; Bushee and
Miller, 2012). Competitors may also find press releases such as product-related information
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and business expansion plans useful (Nichols and Wieland, 2009; Shroff, Sun, White and
Zhang, 2013). We construct 𝑃𝑅 , as the number of firm-initiated press releases that focal firm
i issues during fiscal year t.
3.2 Measure of Competitors’ Financial Constraints
Following Grieser and Liu (2019), we construct competitors’ composite financial
constraints (𝐶𝑐𝑜𝑛𝑠𝑡) in three steps. First, we use the text-based network industry classifications
(TNIC) developed by Hoberg and Phillips (2016) to specify a focal firm’s time-variant
competitor network. Hoberg and Phillips (2016) perform textual analysis on firms’ 10-Ks to
calculate the degree of similarity in product descriptions between pairwise firms. If pairwise
firms’ cosine similarity in product disclosure is above a specific benchmark, 3 pairwise firms
are defined to be product market competitors. Thus, a firm’s competitor network includes all
other firms with whom the firm has a competitive relationship. We obtain the TNIC data from
the Hoberg–Phillips Data Library.4
Second, we measure each competitor’s financial constraint by averaging three constraint
indices: the SA index (Hadlock and Pierce, 2010),5 the WW index (Whited and Wu, 2006),6
and the Delay index (Hoberg and Maksimovic, 2015).7 Higher values of these indices indicate
3
Specifically, a firm’s competitors have cosine values above the pre-specified threshold of 0.2132 (Hoberg and
Philips, 2016).
4
“Text-based network industry classification” (TNIC) for product similarity data can be found at the Hoberg–
Phillips Data Library: http://hobergphillips.tuck.dartmouth.edu/industryclass.htm.
5
The SA index for competitor j in fiscal year t-1 is calculated as 𝑆𝐴 , = −0.737𝐿𝐺𝑇𝐴 , +
0.043𝐿𝐺𝑇𝐴 , − 0.040𝐴𝐺𝐸 , , where 𝐿𝐺𝑇𝐴 , is the natural logarithm of total assets of competitor j in year
t-1 and 𝐴𝐺𝐸 , is the number of years competitor j has been a public firm till year t-1.
6
The WW index for competitor j in fiscal year t-1 is calculated as 𝑊𝑊 , = −0.091𝐶𝐹 , +
0.021𝐿𝐷𝑇𝐴 , − 0.062𝐶𝐷𝐼𝑉 , − 0.044𝐿𝐺𝑇𝐴 , − 0.035𝑆𝐺 , + 0.102𝐷𝑆𝐺 , , where 𝐶𝐹 , is the
ratio of cash flows scaled by total assets for competitor j in fiscal year t-1; 𝐿𝐷𝑇𝐴 , is the ratio of long-term debt
to total assets for competitor j in fiscal year t-1; 𝐶𝐷𝐼𝑉 , is a binary indicator for whether competitor j pays cash
dividends in fiscal year t-1; 𝑆𝐺 , is a competitor j’s sales growth rate in fiscal year t-1; and 𝐷𝑆𝐺 , is the three-
digit SIC industry sales growth rate in fiscal year t-1.
7
The Delay index for competitor j in fiscal year t-1 measures the extent to which competitor j’s investments are
postponed, scaled down or abandoned in fiscal year t-1.
13
that a firm is more financially constrained. Following Grieser and Liu (2019), we winsorize the
three indices at the top and bottom one percentile and transform them to three standardized
normal distributions. Then, we calculate a variable 𝐹𝐶 , as the average of the three
standardized indices for competitor j in fiscal year t-1.
In the last step, we construct a composite measure of competitors’ financial constraints
for a focal firm. 𝐶𝑐𝑜𝑛𝑠𝑡 , is calculated as the average financial constraints of all competitors
of a firm:
∑ ∈ . 𝐹𝐶 ,
𝐶𝑐𝑜𝑛𝑠𝑡 , = (1)
𝑛𝑜. (𝐶 , )
where 𝐶 , is the set of competitors that focal firm i has in fiscal year t-1, as identified by
TNIC. 𝑛𝑜. 𝐶 , is the number of competitors of focal firm i. A higher value of 𝐶𝑐𝑜𝑛𝑠𝑡 ,
indicates a higher level of competitors’ financial constraints.
3.3 Empirical Model
We estimate ordinary least squares regressions of focal firms’ disclosure levels on one-
year lagged competitors’ financial constraints. The baseline model is as follows:
𝐷𝑖𝑠 , = 𝛽 + 𝛽 𝐶𝑐𝑜𝑛𝑠𝑡 , + 𝛽 𝑂𝑐𝑜𝑛𝑠𝑡 , + 𝛽 𝐼𝐴 , + 𝛽 𝑅𝐷 , + 𝛽 𝑅𝐷𝑀𝑖𝑠𝑠𝑖𝑛𝑔 , + 𝛽 𝐴𝐷 , +

𝛽 𝑇𝑁𝐼𝐶_𝐻𝐻𝐼 , + 𝛽 𝑇𝑁𝐼𝐶_𝑇𝑠𝑖𝑚 , + 𝛽 𝑇𝑁𝐼𝐶_𝐸𝑛𝑡𝑟𝑦 , + 𝛽 𝑇𝑁𝐼𝐶_𝑆𝑡𝑎𝑏𝑙𝑒 , + 𝛽 𝑆𝑖𝑧𝑒 , +
𝛽 𝐵𝑖𝑔𝑁 , + 𝛽 𝑀𝐴𝑑𝑢𝑚 , + 𝛽 𝑆𝐸𝑂𝑑𝑢𝑚 , + 𝛽 𝑅𝑒𝑡𝑣𝑜𝑙 , + 𝛽 𝐸𝑎𝑟𝑛𝑣𝑜𝑙 , + 𝛽 𝐿𝑒𝑣 , +
𝛽 𝐼𝑛𝑠𝑂𝑤𝑛 , + 𝛽 𝑀𝐵 , + 𝛽 𝐸𝑃𝑆𝑐ℎ𝑎𝑛𝑔𝑒 , + 𝛽 𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 , + 𝛽 𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑚 , + 𝛽 𝑅𝑒𝑡 , +
𝐹𝑖𝑟𝑚 𝐹𝐸 + 𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝜀 (2)
where subscript i denotes a focal firm, and t and t-1 denote the current and prior fiscal years.
𝐷𝑖𝑠 represents the five disclosure proxies: nondisclosure of customer information (NCD1 and
NCD2), management earnings forecasts (MEF), 8-K filings (8K), and firm-initiated press
releases (PR). We take the natural logarithm of one plus the raw value of each disclosure proxy.
This transformation mitigates the impacts of outliers and skewness on the distributions of
dependent variables.
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The test variable Cconst measures the financial constraints of a focal firm’s competitors.
Since the financial conditions of firms within an industry might be correlated with each other,
competitors’ financial constraints could simply capture a focal firm’s own constraints or an
industry-wide effect. To alleviate this concern, we control for the focal firm’s own financial
constraints (Oconst). Following Grieser and Liu (2019), both Cconst and Oconst are lagged by
one year to mitigate the reverse causality issue and allow time for a focal firm’s managers to
observe and evaluate competing firms’ financial conditions. Because lower values of NCD1
and NCD2 and higher values of MEF, 8K, and PR indicate that a firm discloses more
information, the estimated coefficient on Cconst is predicted to be significantly negative
(positive) in the LnNCD1 and LnNCD2 (LnMEF, Ln8K, and LnPR) regressions.
We include a list of variables to control for time-variant firm characteristics, capital
market incentives, and TNIC-based industry characteristics that plausibly affect a firm’s
disclosure levels. All variable definitions are provided in Appendix A. Following Ellis et al.
(2012), Ali et al. (2014), and Li et al. (2018), control variables (except for MAdum and
SEOdum) are measured in the same year as the dependent variables. 8 Firm-level controls
include firm size, leverage, market-to-book ratio, R&D expenditures to sales, advertisement
expenditure to sales, intangible assets scaled by sales, seasoned equity offerings, mergers and
acquisitions, institutional ownership, Big N auditor, absolute change in earnings per share,
return volatility, earnings volatility, analyst coverage and optimism, and market-adjusted stock
returns (Lang and Lundholm, 1993; Frankel, McNichols and Wilson, 1995; Kasznik and Lev,
1995; Miller, 2002; Ajinkya, Bhojraj and Sengupta, 2005; Rogers and Stocken, 2005; Cotter,
Tuna and Wysocki, 2006; Kothari, Shu and Wysocki, 2009; Ali et al., 2014). To account for
the effect of industry-level competition on disclosure, we include the TNIC-based industry
8
As a robustness check, we also estimate the regressions using one-year lagged control variables. We find similar
results.
15
concentration ratio, total similarity index, entry threat, and industry stability. Finally, firm and
year fixed effects are included to control for time-invariant differences in corporate disclosure
and any economic-wide shocks to corporate disclosure policies. Standard errors are clustered
at the firm level.
4. Sample Selection and Descriptive Statistics
We collect data on customer sales and names from Compustat Customer Segments. We
manually code unidentified customers. We obtain management earnings forecasts from the
I/B/E/S’s Company Issued Guidance, the number of 8-K filings from the SeekEdgar database,
and firm-initiated press releases from RavenPack News Analytics. Product cosine similarity
and other industry-level data come from the Hoberg–Phillips Data Library, while the Delay
index comes from the Hoberg–Maksimovic Financial Constraints Repository. We source
financial data from Compustat, stock return data from CRSP, earnings estimate data from
I/B/E/S, institutional ownership data from the Thomson Reuters’ 13F, and M&A and SEO data
from the SDC Platinum.
The sample period is from 1997 to 2015 because data on the Delay index are only
available for this period. The sample construction proceeds in five steps. From the initial
sample of 153,109 firm-year observations, we first drop 54,226 firm-year observations with
missing customer sales. We further require necessary financial and other data to calculate test
and control variables, deleting 55,944 firm-year observations. Next, we exclude 1,301 firm-
year observations whose CPI-adjusted total sales or assets (inflation-adjusted to 2004 dollars)
are less than $1 million. After that, we delete 2,248 firm-year observations in the utilities (SIC
code 4900-4999) and finance (SIC code 6000-6999) sectors since these firms are less likely to
face intense financial constraints because of their business nature. Lastly, we drop 1,799 firm-
year observations whose headquarters are outside of the United States. The final sample
16
contains 37,591 firm-year observations for the LnNCD1, LnNCD2, LnMEF, and Ln8K
regressions. RavenPack News Analytics does not report press release data before 2000. Thus,
the final sample for the LnPR regression decreases to 32,707 firm-year observations.
Table 1 reports the descriptive statistics for the variables. Competitor constraints
(Cconst) has a mean of −0.144 and a standard deviation of 0.329. On average, firms have 50.7%
of unidentified customers (51.3% of sales attributable to unidentified customers). These
statistics are similar to those reported in Li et al. (2018). Further, the average firm issues 3.047
management earnings forecasts, files 4.420 8-Ks, and has 29.377 firm-initiated press releases
per year.
[INSERT TABLE 1 HERE]
Table 2 reports the Pearson correlation matrix. The correlations between competitors’
financial constraints (Cconst) and each of the corporate disclosure proxies (LnNCD1, LnNCD2,
LnMEF, Ln8K, and LnPR) are −0.098, −0.111, 0.078, 0.037, and 0.006. All correlations are
significant at or above the 5% level in the predicted direction, which is consistent with the
notion that a focal firm tends to disclose more when its rivals face higher financial constraints.
5. Empirical Results
5.1 Main Results
Table 3 reports the main regression results with LnNCD1, LnNCD2, LnMEF, Ln8K, and
LnPR as the dependent variables in Columns (1) to (5), respectively. In Columns (1) and (2),
we find that measures of nondisclosure of customer identities (LnNCD1 and LnNCD2) are
significantly and negatively associated with competitors’ financial constraints (coeff. = −0.021
and −0.028, t-value= −2.670 and −3.590 respectively). This suggests that higher competitors’
financial constraints are associated with firms’ improved customer-information disclosure in
17
the following year. This provides support for our hypothesis. Increasing Cconst from the 25th
(−0.356) to the 75th (0.077) percentile of its distribution is associated with a 0.910 percentage
points decrease in LnNCD1 and a 1.212 percentage points decrease in LnNCD2. The sizes of
the effects are comparable with the impact of analyst following (Coverage) on customer
disclosure9.
Columns (3) to (5) show that the coefficients on Cconst are significantly positive in the
LnMEF, Ln8K and LnPR regressions (coeff. = 0.067, 0.037 and 0.078, t-value= 2.660, 1.827
and 2.881 respectively). Higher competitors’ financial constraints are associated with higher
annual frequency of management earnings forecasts, 8-K filings, and press releases. These
results again support the hypothesis. An increase in Cconst from the 25th to the 75th percentile
of its distribution is associated with a 2.90 percentage increase in management forecasts, a 1.60
percentage increase in 8-K filings, and a 3.38 percentage increase in the number of firm-
initiated press releases10. Overall, these results consistently show a positive relation between
competitors’ financial constraints and corporate disclosure.
Several control variables are significantly associated with the dependent variables after
controlling for firm and year fixed effects. The estimated coefficients on focal firms’ own
financial constraints (Oconst) are significantly negative in Columns (1) and (2) and positive in
Column (4). This suggests that a focal firm with more financial constraints tends to disclose
more to reduce information asymmetry and access more external financing, consistent with Ali
et al. (2014) and Irani and Oesch (2015) but inconsistent with Bernard (2016). Firms with Big
N external auditors, higher institutional ownership, greater analyst coverage, and higher stock
9
Changing Coverage from the 25th percentile to the 75th percentile is associated with 0.7% change in LnNCD1
and LnNCD2.
10
The corresponding effects of changes in Coverage on LnMEF, Ln8K and LnPR are 1.4%, 3.5 and 2.8%
respectively.
18
returns tend to disclose more, consistent with Li (2010) and Ali et al. (2014). Estimated
coefficients on SEOdum are positive and significant in Columns (4) and (5), suggesting that
managers have incentives to file 8-K forms more frequently and issue more press releases
surrounding SEO announcements. In addition, there is evidence that industry characteristics
(TNIC_HHI, TNIC_Tsim, TNIC_Stable and TNIC_Entry) affect management earnings
forecasts. All models are well fitted with adjusted R2 ranging from 0.606 to 0.919.
5.2 Robustness Tests
In this section, we conduct robustness checks to further corroborate the positive relation
between competitors’ financial constraints and a firm’s disclosure level.
5.2.1 Quasi-experimental Evidence: the American Jobs Creation Act
Our baseline analysis may be subject to an omitted variable problem. This problem arises
because competitors’ financial constraints may reflect unobserved sector-specific factors, such
as technological shocks, growth opportunities, and regulatory changes. These sector-specific
characteristics may also affect corporate disclosure. To mitigate this potential endogeneity
concern, we follow Grieser and Liu (2019) to use the passage of the AJCA of 2004 as an
exogenous shock to competitors’ financial constraints. This federal Act increased domestic
investment by reducing the repatriation tax rate for corporate foreign income and requiring the
repatriated foreign income to be used in real corporate investments. Thus, the AJCA loosened
the financial constraints of competitors with significant foreign income.
After the AJCA, competitors with foreign income could have used the repatriated funds
to improve financial health, which imposes higher competition pressure on a disclosing firm.
On this ground, we predict that a focal firm might have disclosed less after the AJCA if its
competitors had a high level of foreign income in the pre-AJCA period. Employing a
19
difference-in-differences design, we examine changes in the disclosure levels of firms with
competitors affected by the AJCA adoption relative to firms with unaffected competitors.
Following Grieser and Liu (2019), we use three years of data both before and after the
AJCA event to construct a sample spanning 2001 to 2006. We define Post as a dummy variable
taking a value of one if observations were in the post-ACJA period (2004–2006), and zero
otherwise. We use a dummy variable, Treat, to indicate treatment and control firms.
Specifically, treated firms (Treat = 1) are those with competitors whose average foreign income
accounted for at least 67% of pre-tax income from 2001 to 2003. Control firms (Treat = 0) are
those with competitors that did not have significant overseas income from 2001 to 2003. Focal
firms with significant foreign income are excluded from the treatment and control groups
because the AJCA can also directly increase these firms’ competitive advantages. We predict
that treatment firms reduce their disclosure in the post-ACJA period relative to control firms.
We conduct a second test based on the ACJA setting. The effect of ACJA on treated firms
relative to control firms may be even stronger for treated firms whose competitors are highly
constrained in the pre-ACJA period. To test this effect, we define Pre_cconst as a dummy
variable taking value of one if a firm’s average competitors’ financial constraints rank above
the third quartile of Cconst over the 2001–2003 period (indicating highly constrained
competitors), and zero otherwise.
In the following model, we regress our disclosure measures on the interaction terms
Treat×Post, Post×Pre_cconst, and Treat×Post×Pre_cconst, control variables, and firm and
year fixed effects:
𝐷𝑖𝑠 , = 𝛽 + 𝛾 𝑇𝑟𝑒𝑎𝑡 × 𝑃𝑜𝑠𝑡 + 𝛾 𝑃𝑟𝑒_𝑐𝑐𝑜𝑛𝑠𝑡 × 𝑃𝑜𝑠𝑡 + 𝛾 𝑇𝑟𝑒𝑎𝑡 × 𝑃𝑜𝑠𝑡 ×

𝑃𝑟𝑒_𝑐𝑐𝑜𝑛𝑠𝑡 + 𝐶𝑜𝑛𝑡𝑟𝑜𝑙𝑠 + 𝐹𝑖𝑟𝑚 𝐹𝐸 + 𝑌𝑒𝑎𝑟 𝐹𝐸 + 𝜀 .
The inclusion of firm and year fixed effects subsume the Treat, Post, Pre_cconst, and
Treat×Pre_cconst variables. We predict that the coefficients on Treat×Post and
20
Treat×Post×Pre_cconst are significantly positive (negative) for the LnNCD1 and LnNCD2
(LnMEF, Ln8K, and LnPR) regressions.
Table 4 reports the results. The estimated coefficients on Treat×Post (coeff. = 0.048,
0.048, −0.248, −0.128, and −0.097) are significantly positive (negative) in the LnNCD1 and
LnNCD2 (LnMEF, Ln8K, and LnPR) regressions. These results suggest that a focal firm
decreased its customer-information disclosure, management earnings forecasts, 8-K filings,
and firm-initiated press releases when its competitors experience significant reductions in
financial constraints after the AJCA adoption.11 The estimated three-way interaction effects of
Treat×Post×Pre_cconst are significantly positive for both LnNCD1 and LnNCD2 regressions
at the 1% level, and we do not find significant triple interaction effects for the LnMEF, Ln8K,
and LnPR regressions. This suggests that the effect of firms’ decreasing customer-information
disclosure in response to competitors repatriating large amounts of foreign income post-2004
is stronger when their competitors had been highly constrained before 2004. Taken together,
this analysis confirms our baseline results.
5.2.2 Alternative Measures of Competitors’ Financial Constraints
The baseline results might be sensitive to different measures of competitors’ financial
constraints. We examine the robustness of the baseline results by replacing Cconst with each
of the three individual measures of competitors’ financial constraints: the SA index (SA_comp),
the WW index (WW_comp), and the Delay index (Delay_comp). These alternative measures of
competitors’ financial constraints are calculated using the same procedures as the overall index
(Cconst).
11
Grieser and Liu (2019) examine the changes in investment behavior of firms with competitors affected by the
AJCA relative to firms with unaffected competitors. Their treated firms are those with competitors that have at
least 33% of pre-tax income overseas. When this lower threshold is adopted, we find consistent but insignificant
results. It appears that, compared with corporate investment in innovation, disclosure policies are stickier and
required larger shocks in product market competition to alter.
21
Table 5 reports the results for using the SA index in Panel A, the WW index in Panel B,
and the Delay index in Panel C. The coefficients on these alternative measures of competitors’
financial constraints are significant with predicted signs in 14 out of 15 regressions. The only
exception is the relation between WW_comp and LnPR, which is positive as predicted but
insignificant. Overall, our results are not sensitive to measures of financial constraints.
5.2.3 Other Robustness Tests
We conduct two additional robustness analyses to check our results. First, we control for
other competitors’ characteristics. Following Grieser and Liu (2019), we add competitors’
average sales level, average market-to-book ratio, average EBIT, and average PPE to the
regressions. These variables are lagged by one year. We note that some of these competitors’
characteristics, including sales, earnings, and PPE, may also reflect competitors’ capacity to
use proprietary information. We nevertheless treat these characteristics as controls in this
analysis. The results are reported in Panel A of Table 6. We find that the coefficients on Cconst
are significant with the predicted signs. The magnitude of the coefficients declines slightly in
the Ln8K and LnPR regressions, suggesting that some of these characteristics may be correlated
with competitors’ financial constraints. Second, we further control for time-variant industry
characteristics in our model by replacing year fixed effects with industry-year fixed effects.
Panel B of Table 6 shows that our findings are mostly robust to this specification.
6. Additional Tests
6.1 Focal Firms’ Financial Constraints
Ex-ante, it is unclear how disclosing firms’ own financial constraints may affect the
relation between competitors’ financial constraints and corporate disclosure. When a firm is
22
financially constrained, it faces higher predation risks and may be reluctant to disclose
information (Bernard, 2016). It follows that highly constrained firms may disclose less even
when competitors also experience worsened financial conditions. In contrast, highly
constrained firms have greater incentives and experience greater difficulties in raising funds
from the capital markets. These firms have a strong incentive to disclose more to reduce
information asymmetry. This suggests that financially constrained firms may be more likely to
exploit competitors’ financial difficulties to disclose more for capital market benefits.
Given the above opposite arguments, we test the net effect of focal firms’ financial
conditions on the relationship between corporate disclosure and competitors’ financial
constraints. We use the median value of focal firms’ financial constraints (Oconst) to partition
the sample into a low constraint subsample and a high constraint subsample. Then we re-
estimate the models separately for the two subsamples. Table 7 reports the results, with Panel
A (B) reporting the results for the high (low) constraint subsample. We find that, in general,
the relations between competitors’ financial constraints and various measures of focal firms’
disclosure are stronger for the sample of the focal firms with low constraints. Panel C reports
the p-value for testing the differences in the estimated coefficients between the two subsamples.
It is shown that the observed differences in estimated Cconst coefficients across subsamples
are significant for Ln8K and LnPR regressions. For the remaining three regressions, the sizes
of the coefficients on Cconst are larger in the low constraint sample, but the differences are not
significant at the conventional level. Overall, the results are consistent with the notion that
firms with higher predation risk (high constraint firms) are less responsive to competitors’
financial conditions.
6.2 High versus Low Institutional Ownership
23
Does investor demand for corporate disclosure affect firms’ reactions to competitors’
financial conditions? To address this question, we study disclosing firms’ institutional
ownership. Institutional investors typically demand additional information from the
management (Chen and Jaggi, 2000). Given institutional investors’ constant probing of firms’
performance outlooks, firms with higher institutional ownership tend to disclose more (Ajinkya
et al., 2005). Thus, we predict that the positive relation between competitor constraints and
disclosure is more pronounced for focal firms with high institutional ownership.
We partition the sample into a low institutional ownership subsample and a high
institutional ownership subsample based on whether a focal firm’s institutional ownership
(InsOwn) is below or above the sample median of InsOwn by year. Then we estimate the
regressions separately for the two subsamples. Results are reported in Table 8. For the high
institutional ownership subsample shown in Panel A, the estimated coefficients are larger in
magnitude and significant at the conventional level. In contrast, for the low institutional
ownership subsample shown in Panel B, the coefficients on Cconst are smaller and mostly
insignificant. Panel C of Table 8 confirms our prediction and shows that the observed
differences in estimated Cconst coefficients across subsamples are significant for the LnNCD1,
LnNCD2, LnMEF, and Ln8K regressions. Taken together, focal firms are more sensitive to
competitor constraints when demands of disclosure from institutional shareholders are greater.
6.3 Pre- versus Post-Reg FD Periods
Structural changes in the disclosure regulation over time can affect managers’ disclosure
decisions in response to competitors’ financial conditions. In recent years, disclosure
regulations have been tightened. For example, in October 2000, the Regulation Fair Disclosure
(Reg FD) was implemented to constrain firms’ abilities to release private information to the
24
selected shareholders and analysts. The Sarbanes–Oxley Act of 2002 also increases the
disclosure requirements for public firms. Over time, firms are required to disclose more,
making it harder for them to hide proprietary information. We predict that the positive relation
between competitor constraints and disclosure attenuated in the post-Reg FD period.
We partition the sample into a pre-Reg FD (before 2001) subsample and a post-Reg FD
(from 2001 onwards) subsample. We estimate the regressions separately for the two periods.
Table 9 shows that, in general, the estimated Cconst coefficients in the pre-Reg FD period
(Panel A) are larger than those in the post-Reg FD period (Panel B). Nearly all estimated
coefficients on Cconst are significant in both Panel A and B, indicating that corporate
disclosure is sensitive to competitor constraints in both periods. In Panel C, the observed
differences in the estimated effects of Cconst on LnNCD1, LnNCD2, Ln8K, and LnPR across
subsamples are significant. Overall, the positive relation between competitor constraints and
focal firms’ disclosure is more pronounced in the pre-Reg FD period. Our results are consistent
with the notion that increased regulatory requirements for disclosure in the post-Reg FD period
improve corporate disclosure, making it harder to hide proprietary information.
6.4 Competitors’ Financial Constraints and Managements’ Perceived Intensity of
Competition
We have argued that firms disclose more in the presence of higher financial constraints
of competitors because managers perceive lower competitive pressures. In this section, we
attempt to provide some direct evidence on the impact of competitors’ financial constraints on
management’s assessment of intensity of product market competition. Li, Lundholm, and
Minnis (2013) develop a text-based measure of perceived intensity of competition, which is
the percentage of competition-related words disclosed in firms’ 10-K filings (PCTCOMP). We
25
obtain this measure from Professor Li’s website 12 and regress it on the contemporaneous
measure of competitors’ financial constraint. Because the data are only available until 2010,
our sample size drops to 18,633.
Results are reported in column (1), table 10. We find that the coefficient on Cconst is
negative and significant, indicating that focal firms’ management perceives less competitive
environment in the presence of more constrained competing firms. This provides support to
our argument that increases in competitors’ financial constraints lessen managers’ perceived
intensity of product market competition, which reduce the proprietary cost of disclosure. In
addition, the coefficient on Oconst is significantly positive, consistent with firms facing greater
predation risks when their own financial constraints are high (Bernard, 2016).
6.5 Competitors’ Financial Constraints and the Readability and Length of 10-K Filings
So far, we have shown that competitors’ financial constraints have a positive effect on
measures capturing corporate voluntary disclosure. In this section, we extend the analysis to
examine whether competitors’ financial constraints affect characteristics of disclosing firms’
mandatory disclosure, including the readability and length of firms’ 10-K filings.
Following prior literature (e.g., Li, 2008; Lehavy, Li and Merkley, 2011), we measure
the readability of focal firms’ 10-K filings using the Gunning–Fog index (Fog).13 We also use
the natural logarithm of one plus the average number of words per sentence (LnWDS) as an
alternative measure of the readability of 10-K filings. A lower value of Fog/LnWDS means that
the 10-K filing is more readable. The length of focal firms’ 10-K filings is measured using the
following variables: (1) the natural logarithm of one plus the total words in a firm’s 10-K
12
This dataset is available at: http:// webuser.bus.umich.edu/feng/
13
Fog = (average number of words per sentence + percent of complex words) × 0.4.
26
(LnWD) and (2) the natural logarithm of one plus the total number of sentences in the focal
firm’s 10-K (LnSCE). Longer 10-K fillings combined with more readable 10-Ks suggests
improvement in mandatory disclosure. We replace the dependent variables in the baseline
regressions with the readability and length variables.
The results of the effect of competitors’ financial constraints on focal firms’ 10-K
readability and length are reported in Table 10. In Columns (2) and (3), the dependent variables
are measures of 10-K readability (Fog and LnWDS respectively). The coefficients on Cconst
are negative and significant in both regressions, indicating that competitors’ financial
constraints have a positive effect on the readability of focal firms’ 10-K filings. In Columns (4)
and (5), the dependent variables are measures of 10-K length (LnWD and LnSCE respectively).
The results show that focal firms tend to have longer 10-K filings when their competitors have
higher financial constraints. The results regarding 10-K length are relatively difficult to
interpret because 10-K length could capture firms’ operating complexity, disclosure
redundancy, and residual disclosure, which is subject to managerial discretion (Cazier and
Pfeiffer, 2016). Given that there is a positive relation between competitors’ financial
constraints and focal firms’ 10-K readability, the results in Columns (4) and (5) are more
consistent with the notion that focal firms’ managers tend to disclose more when their
competitors have higher financial constraints. Overall, our findings suggest that, when
perceiving higher competitors’ constraints and thus lower proprietary costs of disclosure,
managers improve the readability and length of mandatory disclosure.
7. Conclusion
This study examines the association between competitors’ financial constraints and firms’
disclosure. We find that, in the presence of more constrained competitors, a firm reveals more
27
customer-information disclosure, provides more management earnings forecasts, files 8-K
forms more frequently, and issues more firm-initiated press releases. The results are robust to
a set of sensitivity analyses as well as a difference-in-differences design exploring an
exogenous shock to the financial constraints of competitors with significant foreign income.
The impact of competitors’ financial constraints on focal firms’ disclosure is more pronounced
for focal firms that have lower financial constraints and higher institutional ownership and are
in the post-Reg FD period. In addition, competitors’ financial constraints have a positive effect
on the readability and length of focal firms’ 10-K filings.
Our study contributes to the corporate disclosure literature (Bamber and Cheon, 1998;
Harris, 1998; Botosan and Stanford, 2005; Verrecchia and Weber, 2006; Li, 2010; Ali et al.,
2014) by providing evidence that proprietary costs of disclosure vary with rival firms’
constraints that inhibit their ability to effectively exploit disclosure. Further, we extend the
literature on the reaction of firms to competitors’ financial constraints (e.g., Bolton and
Scharfstein, 1990; Borenstein and Rose, 1995; Rauh, 2006; Grieser and Liu, 2019) by
examining corporate disclosure decisions, which has implications for regulators, managers, and
users of corporate disclosure.
28
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32
Table 1: Descriptive Statistics
Variables N Mean SD 25% Median 75%

Dependent Variables
NCD1 37,591 0.507 0.440 0.040 1.000 1.000
NCD2 37,591 0.513 0.440 0.060 1.000 1.000
MEF 37,591 3.047 5.647 0.000 1.000 12.000
8K 37,591 4.420 6.590 0.000 2.140 9.000
PR 32,707 29.377 29.026 8.000 23.000 41.000
LnNCD1 37,591 0.410 0.300 0.040 0.693 0.693
LnNCD2 37,591 0.414 0.300 0.060 0.693 0.693
LnMEF 37,591 1.398 0.787 0.000 0.693 2.565
Ln8K 37,591 1.690 1.210 0.000 1.144 2.303
LnPR 32,707 3.414 0.920 2.197 3.178 3.738
Test Variable
Cconst 37,591 -0.144 0.329 -0.356 -0.145 0.077
Control Variables
Oconst 37,591 -0.167 0.536 -0.442 -0.200 0.167
IA 37,591 0.268 0.521 0.001 0.070 0.286
RD 37,591 0.341 1.052 0.006 0.062 0.193
RDMissing 37,591 0.368 0.482 0.000 0.000 1.000
AD 37,591 0.037 0.000 0.006 0.016 0.040
TNIC_HHI 37,591 0.245 0.209 0.092 0.166 0.336
TNIC_Tsim 37,591 4.133 5.234 1.197 1.908 4.390
TNIC_Entry 37,591 0.035 0.063 0.000 0.000 0.043
TNIC_Stable 37,591 0.505 0.500 0.000 1.000 1.000
Size 37,591 5.478 1.778 4.161 5.475 6.871
BigN 37,591 0.727 0.446 0.000 1.000 1.000
MAdum 37,591 0.497 0.500 0.000 0.000 1.000
SEOdum 37,591 0.235 0.424 0.000 0.000 1.000
Retvol 37,591 0.017 0.109 0.009 0.014 0.021
Earnvol 37,591 0.116 0.188 0.022 0.049 0.123
Lev 37,591 0.552 0.355 0.324 0.547 0.725
InsOwn 37,591 0.126 0.318 0.002 0.008 0.213
MB 37,591 2.064 2.276 1.532 1.628 2.435
EPSchange 37,591 0.456 0.534 0.000 0.062 0.835
Coverage 37,591 6.610 6.267 2.000 4.000 9.000
Optimism 37,591 0.562 5.270 -0.380 0.050 0.987
Ret 37,591 0.038 0.280 -0.018 -0.075 0.173
Notes: This table reports the descriptive statistics of the dependent variables, test variable and control variables.
Variable definitions can be found in Appendix A.
33
Table 2: Correlation Matrix
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28)
(1) LnNCD1 1.000
(2) LnNCD2 0.933 1.000
(3) LnMEF -0.003 0.004 1.000
(4) Ln8K -0.039 -0.033 0.422 1.000
(5) LnPR -0.030 -0.022 0.354 0.422 1.000
(6) Cconst -0.098 -0.111 0.078 0.037 0.006 1.000
(7) Oconst -0.098 -0.108 0.014 0.072 0.100 0.476 1.000
(8) IA 0.044 0.045 0.105 0.135 0.134 0.052 -0.041 1.000
(9) RD -0.068 -0.071 0.034 0.116 0.033 0.316 0.250 0.110 1.000
(10) RDMissing 0.032 0.043 -0.119 -0.061 -0.074 -0.210 -0.109 0.013 -0.193 1.000
(11) AD 0.046 0.047 0.028 0.022 0.003 0.043 0.027 0.065 0.006 -0.033 1.000
(12) TNIC_HHI 0.024 0.023 -0.076 0.009 -0.086 -0.206 -0.073 -0.032 -0.111 0.037 0.030 1.000
(13) TNIC_Tsim -0.131 -0.130 0.032 0.094 0.075 0.419 0.257 0.046 0.482 -0.131 -0.027 -0.399 1.000
(14) TNIC_Entry -0.026 -0.028 -0.177 -0.214 -0.092 0.210 0.138 0.004 0.053 -0.002 0.076 -0.145 0.188 1.000
(15) TNIC_Stable -0.003 -0.001 -0.088 -0.155 -0.106 0.079 0.050 -0.030 0.013 0.005 0.002 -0.163 0.026 0.106 1.000
(16) Size 0.081 0.095 0.311 0.126 0.310 -0.398 -0.619 0.187 -0.159 0.154 -0.027 -0.117 -0.060 -0.135 -0.051 1.000
(17) BigN 0.013 0.020 0.204 0.032 0.159 -0.061 -0.196 0.050 0.042 -0.034 0.009 -0.109 0.076 -0.052 -0.016 0.379 1.000
(18) MAdum 0.027 0.033 0.093 0.009 0.106 -0.060 -0.136 0.100 -0.065 -0.001 -0.027 -0.010 -0.032 0.027 0.002 0.216 0.077 1.000
(19) SEOdum -0.028 -0.025 0.017 0.091 0.054 0.036 0.064 0.032 0.114 0.004 -0.014 -0.043 0.107 -0.002 0.003 0.014 0.008 0.033 1.000
(20) Retvol -0.059 -0.065 -0.086 -0.075 -0.203 0.304 0.347 -0.051 0.131 -0.127 0.048 -0.056 0.149 0.139 0.056 -0.379 -0.104 -0.059 0.017 1.000
(21) Earnvol -0.069 -0.073 0.010 0.064 -0.014 0.286 0.340 0.036 0.204 -0.130 0.036 -0.044 0.160 0.010 0.003 -0.319 -0.092 -0.076 0.033 0.224 1.000
(22) Lev 0.052 0.059 0.045 0.114 0.099 -0.140 -0.125 0.135 -0.053 0.155 -0.008 -0.001 -0.015 -0.067 -0.031 0.286 0.055 0.050 0.029 -0.095 -0.032 1.000
(23) InsOwn -0.029 -0.039 0.354 0.279 0.274 0.177 0.288 0.050 -0.052 -0.065 -0.023 -0.060 -0.028 -0.147 -0.080 0.444 0.239 0.227 0.020 -0.135 -0.171 -0.007 1.000
(24) MB -0.010 -0.013 0.111 0.125 0.116 0.110 0.018 0.028 0.139 -0.135 0.059 -0.071 0.177 0.068 -0.015 0.029 0.051 0.096 0.049 -0.030 0.118 0.278 0.070 1.000
(25) EPSchange 0.017 0.018 -0.023 0.004 -0.010 -0.049 -0.012 -0.010 -0.025 0.023 -0.005 0.142 -0.067 -0.040 -0.021 -0.014 -0.022 -0.019 -0.010 -0.012 -0.026 0.018 -0.022 -0.034 1.000
(26) Coverage -0.020 -0.015 0.299 0.217 0.248 -0.031 -0.168 0.075 0.025 -0.082 0.008 -0.115 0.084 -0.095 -0.053 0.343 0.188 0.152 0.034 -0.078 -0.061 0.096 0.399 0.231 -0.032 1.000
(27) Optimism 0.001 0.004 0.122 0.027 0.053 -0.052 -0.086 0.049 -0.050 0.020 -0.012 -0.012 -0.033 -0.020 -0.012 0.111 0.038 0.015 -0.029 -0.037 -0.049 0.028 0.035 -0.036 -0.025 0.034 1.000
(28) Ret -0.018 -0.014 0.208 0.123 0.111 -0.020 -0.038 0.024 0.010 0.044 0.007 -0.050 0.051 -0.033 -0.020 0.140 0.064 -0.017 0.043 0.019 0.018 0.096 -0.019 -0.007 0.004 0.076 0.118 1.000
Notes: This table reports the Pearson correlation matrix of the variables in the baseline model. The correlations that are statistically significant at the 5% level or better are shown in
bold. Variable definitions can be found in Appendix A.
34
Table 3: The Association between Competitors’ Financial Constraints and
Corporate Disclosure
(1) (2) (3) (4) (5)

LnNCD1 LnNCD2 LnMEF Ln8K LnPR
Cconst -0.021*** -0.028*** 0.067*** 0.037* 0.078***
(-2.670) (-3.590) (2.660) (1.827) (2.881)
Oconst -0.009* -0.009* 0.023 0.026** 0.029
(-1.695) (-1.696) (1.380) (1.977) (1.593)
IA 0.006 0.006 -0.020 0.029** 0.031
(1.149) (0.967) (-1.194) (2.086) (1.616)
RD -0.000 0.002 -0.038*** -0.002 0.007
(-0.099) (0.513) (-4.133) (-0.306) (0.820)
RDMissing 0.001 0.012 -0.075** 0.072** -0.068*
(0.075) (1.126) (-2.311) (2.314) (-1.904)
AD -0.010 0.018 0.144 -0.047 0.025
(-0.118) (0.211) (0.663) (-0.344) (0.092)
TNIC_HHI 0.006 0.007 -0.116*** -0.007 0.035
(0.569) (0.661) (-3.669) (-0.284) (0.929)
TNIC_Tsim -0.001 -0.001 -0.008*** -0.001 0.002
(-1.448) (-1.488) (-3.186) (-0.570) (0.532)
TNIC_Entry 0.007 0.015 -0.209** -0.016 0.154
(0.246) (0.513) (-2.155) (-0.302) (1.389)
TNIC_Stable 0.003 0.004 -0.017** -0.013*** -0.009
(1.003) (1.512) (-2.126) (-2.629) (-1.103)
Size 0.007* 0.007* 0.203*** -0.001 0.130***
(1.925) (1.853) (19.062) (-0.065) (10.936)
BigN -0.000 0.002 0.032* 0.002 0.045**
(-0.021) (0.348) (1.742) (0.184) (2.100)
MAdum -0.006 -0.006 -0.040*** -0.003 0.028*
(-1.227) (-1.226) (-2.809) (-0.317) (1.852)
SEOdum -0.010 -0.008 -0.004 0.085*** 0.081***
(-0.854) (-0.680) (-0.125) (4.194) (2.633)
Retvol 0.034* 0.025 -0.139*** 0.324*** 0.076
(1.923) (1.388) (-2.639) (8.992) (1.176)
Earnvol -0.020 -0.017 -0.100** 0.058* 0.054
(-1.296) (-1.067) (-2.435) (1.856) (1.019)
Lev -0.001 0.005 -0.047** 0.106*** -0.007
(-0.159) (0.627) (-2.179) (5.295) (-0.255)
InsOwn -0.004 0.006 0.478*** 0.221*** 0.253***
(-0.336) (0.566) (14.134) (7.911) (6.950)
MB -0.001 -0.001 -0.003 -0.000 0.003
(-0.440) (-1.029) (-0.861) (-0.045) (0.802)
EPSchange 0.004* 0.004* 0.006 -0.004 0.013*
(1.805) (1.846) (0.812) (-0.909) (1.717)
Coverage -0.001** -0.001** 0.002*** 0.005** 0.004***
(-2.086) (-2.078) (9.644) (4.195) (5.313)
Optimism -0.000 -0.000 0.002* 0.000 0.002
(-1.395) (-0.246) (1.700) (0.268) (1.482)
Ret 0.012 0.014 1.010*** 0.063** 0.096***
(1.405) (1.520) (23.445) (2.023) (3.778)
Intercept 0.456*** 0.454*** 0.497*** 0.882*** 1.729***
(21.084) (21.107) (8.340) (13.491) (24.250)
Firm FE Y Y Y Y Y
35
Year FE Y Y Y Y Y
N 37,591 37,591 37,591 37,591 32,707
Adjusted R2 0.606 0.620 0.678 0.919 0.851
Notes: This table reports results of the effects of competitors’ financial constraints on focal firms’ disclosure
levels. In column (1), the dependent variable is the natural logarithm of (1+NCD1), where NCD1 is the
percentage of reported customers without customer identity information. In column (2), the dependent
variable is the natural logarithm of (1+NCD2), where NCD2 is the percentage of sales that cannot be
attributable to identified customers. In column (3), the dependent variable is the natural logarithm of
(1+MEF), where MEF is the annual frequency of management earnings forecasts issued by the focal firm.
In column (4), the dependent is the natural logarithm of (1+8K), where 8K is the annual frequency of 8-K
forms a focal firm files with SEC. In column (5), the dependent variable is the natural logarithm of (1+PR),
where PR is the annual frequency of firm-initiated press releases. The sample period is over 1997-2015 in
columns (1)-(4), and 2000-2015 in column (5). The test variable Cconst is the competitors’ composite
financial constraints in the preceding year. Both the test variable Cconst and control variable Oconst are
lagged by one year. The other control variables are contemporaneous to the dependent variable in each
model. Variable definitions can be found in Appendix A. All models include firm and year fixed effects. T-
statistics are reported in parentheses. Standard errors are clustered at the focal firm level. ***, **, and *
respectively indicate significance at the 0.01, 0.05 and 0.10 levels for two-tailed tests.
36
Table 4: Quasi-Natural Experiment: the American Jobs Creation Act of 2004
(1) (2) (3) (4) (5)

Treat×Post 0.048*** 0.048*** -0.248*** -0.128*** -0.097***
(3.039) (2.999) (-4.854) (-3.697) (-4.048)
Treat×Post×Pre_cconst 0.097** 0.083** -0.098 0.006 -0.070
(2.154) (2.071) (-0.794) (0.071) (-0.867)
Post×Pre_cconst -0.018 -0.040 -0.110 -0.063 0.006
(-0.417) (-1.099) (-0.971) (-0.865) (0.075)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 2,098 2,098 2,098 2,098 2,098
Adjusted R2 0.569 0.602 0.727 0.753 0.610
Notes: This table reports the results of a difference-in-differences analysis using the passage of the American
Jobs Creation Act of 2004 (AJCA) as a shock to competitors’ financial constraints. Three years of data both
before and after the AJCA (2001-2006) are used. Treat is a dummy variable which equals one for firms with
competitors whose foreign income accounts for at least an average of 67% of pre-tax income over 2001–
2003, and zero otherwise. Post is a dummy variable taking value of one after the AJCA (2004-2006), and
zero otherwise. Pre_cconst is a dummy variable taking value of one if a focal firm’s competitors constraints
rank above the third quartile of Cconst over 2001-2003, and zero otherwise. The inclusion of firm and year
fixed effects subsume the Treat, Post, Pre_cconst, and Treat×Pre_cconst variables. Variable definitions can
be found in Appendix A. All models include full controls, firm and year fixed effects. T-statistics are reported
in parentheses. Standard errors are clustered at the focal firm level. ***, **, and * respectively indicate
significance at the 0.01, 0.05 and 0.10 levels for two-tailed tests.
37
Table 5: Alternative Measures of Competitors’ Financial Constraints
Panel A: Size-Age Index

(1) (2) (3) (4) (5)
SA_comp -0.004*** -0.005*** 0.011** 0.007** 0.010***
(-2.928) (-3.557) (2.328) (2.461) (2.854)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 37,591 37,591 37,591 37,591 32,707
Adjusted R2 0.606 0.620 0.654 0.919 0.812
Panel B: Whited-Wu Index

(1) (2) (3) (4) (5)
WW_comp -0.003** -0.003** 0.010** 0.006** 0.006
(-2.199) (-2.404) (2.241) (2.068) (1.616)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 37,591 37,591 37,591 37,591 32,707
Adjusted R2 0.606 0.620 0.678 0.919 0.811
Panel C: Delay Index

(1) (2) (3) (4) (5)
Delay_comp -0.003** -0.003** 0.009** 0.006** 0.012***
(-2.273) (-2.342) (1.977) (2.009) (3.555)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 37,591 37,591 37,591 37,591 32,707
Adjusted R2 0.606 0.620 0.678 0.919 0.812
Notes: This table presents results using alternative measures of competitors’ financial constraints. Panel A reports
results using competitors’ Size-Age index. Panel B reports results using competitors’ Whited-Wu index. Panel
C reports results using competitors’ Delay index. Variable definitions can be found in Appendix A. All models
include full controls, firm and year fixed effects. T-statistics are reported in parentheses. Standard errors are
clustered at the focal firm level. ***, **, and * respectively indicate significance at the 0.01, 0.05 and 0.10 levels
for the two-tailed test.
38
Table 6: Other Robustness Tests
Panel A: Control for Competitors’ Other Characteristics

(1) (2) (3) (4) (5)
Cconst -0.023** -0.027*** 0.100*** 0.036* 0.050*
(-2.318) (-2.761) (3.176) (1.660) (1.647)
Sale_comp 0.000 -0.001 -0.012 -0.003 -0.010
(0.053) (-0.283) (-1.180) (-0.428) (-0.930)
MB_comp 0.001 0.001 -0.009 0.001 0.025***
(0.604) (0.718) (-1.412) (0.225) (3.572)
EBIT_comp -0.005 0.003 0.240*** 0.085** -0.077
(-0.266) (0.175) (3.927) (2.152) (-1.164)
PPE_comp -0.002 -0.001 -0.048 0.004 -0.003
(-0.144) (-0.083) (-1.298) (0.138) (-0.067)
Oconst -0.013** -0.013** 0.031* 0.016 0.031
(-2.336) (-2.259) (1.750) (1.311) (1.639)
Other Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 37,591 37,591 37,591 37,591 32,707
Adjusted R2 0.623 0.637 0.686 0.942 0.867
Panel B: Control for Firm and Industry-year Interaction Fixed Effects

(1) (2) (3) (4) (5)
Cconst -0.016* -0.023*** 0.065** 0.026 0.072**
(-1.926) (-2.770) (2.499) (1.236) (2.528)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Industry×Year FE Y Y Y Y Y
N 37,591 37,591 37,591 37,591 32,707
Adjusted R2 0.623 0.637 0.696 0.926 0.868
Notes: This table presents results on other robustness tests. Panel A reports results after controlling for
competitors’ other characteristics. We add Sale_comp, MB_comp, EBIT_comp, and PPE_comp to the baseline
model. Sale_comp is the average of competitors’ natural logarithm of total sales in the preceding year. MB_comp
is the average of competitors’ market-to-book ratio in the preceding year. EBIT_comp is the average of
competitors’ earnings before interests scaled by total assets in the preceding year. PPE_comp is the average of
competitors’ net PPE scaled by total assets in the preceding year. Variable definitions can be found in Appendix
A. Panel B reports results after controlling for firm and industry×year fixed effects. T-statistics are reported in
parentheses. Standard errors are clustered at the focal firm level. ***, **, and * respectively indicate significance
at the 0.01, 0.05 and 0.10 levels for the two-tailed test.
39
Table 7: Cross-sectional Heterogeneity in Focal Firms’ Financial Constraints
Panel A: Subsample of Focal Firms with High Financial Constraints

(1) (2) (3) (4) (5)
Cconst -0.017* -0.023** 0.038 -0.023 0.071**
(-1.816) (-2.408) (1.183) (-0.876) (2.038)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 20,092 20,092 20,092 20,092 18,688
Adjusted R2 0.642 0.647 0.690 0.916 0.856
Panel B: Subsample of Focal Firms with Low Financial Constraints

(1) (2) (3) (4) (5)
Cconst -0.032** -0.038*** 0.118*** 0.150*** 0.146***
(-2.317) (-2.795) (3.023) (5.318) (3.276)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 17,499 17,499 17,499 17,499 14,019
Adjusted R2 0.629 0.650 0.684 0.943 0.889
Panel C: P-values for the Differences in Estimated Coefficients on Cconst across

Subsamples
(1) (2) (3) (4) (5)
P-values 0.347 0.362 0.117 0.000 0.001
Notes: Panel A reports results of the effects of competitors’ financial constraints on focal firms’ disclosure levels
for the subsample of focal firms with above annual median financial constraints. Panel B reports results of the
effects of competitors’ financial constraints on focal firms’ disclosure levels for the subsample of focal firms with
below annual median financial constraints. Panel C reports p-values for testing the differences in estimated
coefficients on Cconst across the two subsamples. Variable definitions can be found in Appendix A. All models
40
Table 8: Cross-sectional Heterogeneity in Institutional Ownership
Panel A: Subsample of Focal Firms with High Institutional Ownership

(1) (2) (3) (4) (5)
Cconst -0.039*** -0.044*** 0.140*** 0.136*** 0.085*
(-3.445) (-3.781) (3.852) (4.451) (1.881)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 19,945 19,945 19,945 19,945 18,759
Adjusted R2 0.667 0.615 0.625 0.907 0.832
Panel B: Subsample of Focal Firms with Low Institutional Ownership

(1) (2) (3) (4) (5)
Cconst -0.009 -0.014 0.010 -0.005 0.074**
(-0.781) (-1.289) (0.308) (-0.217) (2.243)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 17,646 17,646 17,646 17,646 13,948
Adjusted R2 0.647 0.666 0.663 0.941 0.813

Subsamples
(1) (2) (3) (4) (5)
P-values 0.071 0.026 0.000 0.000 0.762
Notes: In this table, Panel A reports results of the effects of competitors’ financial constraints on focal firms’
disclosure levels for the subsample of focal firms with above annual median institutional ownership. Panel B reports
results of the effects of competitors’ financial constraints on focal firms’ disclosure levels for the subsample of
focal firms with low institutional ownership. Panel C reports p-values for testing the differences in estimated
41
Table 9: Pre- versus Pos-Regulation Fair Disclosure periods
Panel A: Pre-Reg FD period

(1) (2) (3) (4) (5)
Cconst -0.032* -0.035** 0.230*** 0.189*** 0.230***
(-1.912) (-2.197) (4.037) (6.160) (3.474)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 11,514 11,514 11,514 11,514 6,630
Adjusted R2 0.648 0.660 0.605 0.483 0.837
Panel B: Post-Reg FD period

(1) (2) (3) (4) (5)
Cconst -0.017* -0.023*** 0.060** 0.023 0.056*
(-1.910) (-2.582) (2.154) (1.098) (1.938)
Controls Y Y Y Y Y
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 26,077 26,077 26,077 26,077 26,077
Adjusted R2 0.669 0.686 0.733 0.915 0.782

Subsamples
(1) (2) (3) (4) (5)
P-values 0.074 0.026 0.153 0.000 0.000
Notes: In this table, Panel A reports results of the effects of competitors’ financial constraints on focal firms’
disclosure levels for the subsample of focal firms in the pre-Reg FD period (before 2001); Panel B reports results
of the effects of competitors’ financial constraints on focal firms’ disclosure levels for the subsample of focal firms
in the post-Reg FD period (after and including 2001); Panel C reports p-values to test the difference in estimated
42
Table 10: Competitors’ Financial Constraints, Management’s Perceived Competition,
10-K Readability and Length
(1) (2) (3) (4) (5)

PCTCOMP Fog LnWDS LnWD LnSCE
Cconst -0.028** -0.066** -0.010* 0.071*** 0.081***
(-2.109) (-1.992) (-1.906) (3.227) (3.710)
Oconst 0.023** -0.162*** -0.017*** -0.021 -0.005
(2.169) (-7.912) (-5.334) (-1.437) (-0.330)
IA 0.011 0.037* 0.005* 0.017 0.011
(0.902) (1.796) (1.826) (1.052) (0.729)
RD 0.010 -0.026** -0.003* -0.014 -0.011
(0.522) (-2.369) (-1.910) (-1.610) (-1.265)
RDMissing -0.005 -0.000 0.000 0.059* 0.058*
(-0.210) (-0.007) (0.028) (1.864) (1.820)
AD 0.055 -0.358 -0.014 0.179 0.204
(0.315) (-1.369) (-0.342) (0.980) (1.060)
TNIC_HHI -0.021 0.062 0.014** -0.026 -0.039
(-1.027) (1.464) (2.154) (-0.816) (-1.234)
TNIC_Tsim 0.005** -0.008*** -0.001*** 0.006** 0.008***
(2.399) (-2.659) (-2.842) (2.402) (2.899)
TNIC_Entry 0.003 0.219 0.028 0.098 0.065
(0.646) (1.633) (1.362) (1.021) (0.694)
TNIC_Stable 0.106** -0.010 -0.000 -0.021*** -0.020***
(2.194) (-0.960) (-0.007) (-2.652) (-2.599)
Size -0.000 -0.001 -0.000 -0.019* -0.019**
(-0.026) (-0.073) (-0.220) (-1.919) (-2.079)
BigN 0.023** 0.041*** 0.008*** 0.066*** 0.058***
(2.220) (2.664) (3.502) (6.092) (5.286)
MAdum -0.004 -0.022 -0.003 0.029* 0.031*
(-0.549) (-0.952) (-0.890) (1.839) (1.960)
SEOdum 0.006 -0.006 0.000 -0.003 -0.002
(0.281) (-0.311) (0.001) (-0.193) (-0.187)
Retvol 0.140*** -0.098** -0.017** -0.003 0.015
(3.908) (-2.265) (-2.472) (-0.088) (0.461)
Earnvol -0.008 0.022 -0.003 0.053 0.056
(-0.221) (0.308) (-0.285) (0.954) (1.003)
Lev -0.015 -0.046 -0.006 0.070* 0.077*
(-1.024) (-0.991) (-0.802) (1.841) (1.957)
InsOwn -0.005 0.123*** 0.022*** 0.071*** 0.049**
(-0.267) (3.954) (4.772) (3.342) (2.400)
MB 0.007*** 0.011 0.002 0.003 0.001
(2.587) (0.274) (0.259) (0.107) (0.025)
EPSchange -0.006 -0.005 -0.002** -0.005* -0.004
(-1.443) (-1.147) (-2.390) (-1.953) (-1.409)
Coverage -0.003** -0.007 0.001 -0.013 -0.014
(-2.072) (-0.715) (0.613) (-1.551) (-1.632)
Optimism 0.001 -0.001 0.001* -0.002 -0.002
(1.384) (-0.448) (1.896) (-0.860) (-1.305)
Ret 0.004 -0.000 -0.000 0.000 0.001
43
(0.313) (-0.332) (-0.682) (0.430) (0.639)
Intercept 0.471*** 0.001 -0.000 0.073*** 0.073***
(9.864) (0.045) (-0.074) (2.954) (2.928)
Firm FE Y Y Y Y Y
Year FE Y Y Y Y Y
N 18,633 34,219 34,219 34,219 34,219
Adjusted R2 0.509 0.339 0.235 0.326 0.304
Notes: This table presents results on the association between competitors’ financial constraints, management’s
perceptions of the intensity of the competition and 10-K readability. In column (1), the dependent variable is the
management’s perception of the intensity of the competition as revealed in the firm’s 10-K fillings. In column (2),
the dependent variable is the Gunning-Fog index of the focal firm’s 10-K. In column (3), the dependent variable is
the natural logarithm of (1+WDS), where WDS is the total word count divided by the total number of sentences in
the focal firm’s 10-K. In column (4), the dependent variable is the natural logarithm of (1+WD), where WD is the
total word count in the focal firm’s 10-K. In column (5), the dependent variable is the natural logarithm of (1+SCE),
where SCE is the total number of sentences in the focal firm’s 10-K. The data to construct the dependent variables
are obtained from the SeekEdgar database. Variable definitions can be found in Appendix A. All models include
firm and year fixed effects. T-statistics are reported in parentheses. Standard errors are clustered at the focal firm
level. ***, **, and * respectively indicate significance at the 0.01, 0.05 and 0.10 levels for two-tailed tests.
44
Appendix A: Variable Definitions
Variable Definition
Variables used in Baseline Analyses
Dependent Variables:
𝐿𝑛𝑁𝐶𝐷1 , Natural logarithm of (1+the percentage of unidentified customers in focal firm i’s
customer segment reporting in fiscal year t).
𝐿𝑛𝑁𝐶𝐷2 , Natural logarithm of (1+the percentage of focal firm i’s total customer sales that
cannot be attributable to identified customers in fiscal year t).
𝐿𝑛𝑀𝐸𝐹 , Natural logarithm of (1+the number of earnings forecasts made by managers of
focal firm i during fiscal year t).
𝐿𝑛8𝐾 , Natural logarithm of (1+the number of 8-K forms filed by focal firm i during fiscal
year t).
𝐿𝑛𝑃𝑅 , Natural logarithm of (1+the number of firm-initiated press releases issued by focal
firm i during fiscal year t).
Test Variable:
𝐶𝑐𝑜𝑛𝑠𝑡 , A composite measure of competitors’ financial constraints, summating focal firm
i’s each competitor j’s financial constraints (𝐹𝐶 , ) in fiscal year t-1, divided by
the number of competitors that focal firm i has in fiscal year t-1. 𝐹𝐶 , is
calculated as the average of competitor j’s three financial constraint indices,
including Size-Age index (Hadlock and Pierce, 2010), Whited-Wu index (Whited
and Wu, 2006) and Delay index ((Hoberg and Maksimovic, 2015), in fiscal year
t-1.
Control variables:
𝑂𝑐𝑜𝑛𝑠𝑡 , A composite measure of focal firm i’s own financial constraints, which is the
average of Size-Age, Whited-Wu, and Delay indices of focal firm i in fiscal year
t-1.
𝐼𝐴 , Focal firm i’s intangible assets net of goodwill, scaled by its total sales in fiscal
year t.
𝑅𝐷 , Focal firm i's total R&D expenditure, scaled by its total sales in fiscal year t.
𝑅𝐷𝑀𝑖𝑠𝑠𝑖𝑛𝑔 , A dummy variable equals to one if R&D of focal firm i in fiscal year t is missing,
and zero otherwise.
𝐴𝐷 , Focal firm i's total advertising expenditure, scaled by its total sales in fiscal year
t.
𝑇𝑁𝐼𝐶_𝐻𝐻𝐼 , 𝑇𝑁𝐼𝐶_𝐻𝐻𝐼 , is constructed by squaring each incumbent’s market share in the
TNIC-based industry where focal firm i belongs in fiscal year t and then summing
these squaring values (Ali et al., 2014; Hoberg and Phillips, 2016).
𝑇𝑁𝐼𝐶_𝑇𝑠𝑖𝑚 , Hoberg and Phillips (2016) considers a TNIC-based industry containing focal firm
i and its competitors in fiscal year t.
𝑇𝑁𝐼𝐶_𝑇𝑠𝑖𝑚 , is constructed by summing each competitor’s net similarity index
relative to focal firm i. A competitor’s net similarity index is the raw product
cosine similarity value between this competitor and focal firm i less the minimum
similarity threshold (0.2132). 𝑇𝑁𝐼𝐶_𝑇𝑠𝑖𝑚 , (the total similarity index for focal
firm i in fiscal year t) measures the degree of market competitiveness focal firm i
faces.
𝑇𝑁𝐼𝐶_𝐸𝑛𝑡𝑟𝑦 , The industry entry rate is constructed by calculating the percentage of new players
in the TNIC-based industry where focal firm i belongs in fiscal year t (Klapper,
Laeven and Rajan, 2006). A new player is defined as a firm that has become an
incumbent in the TNIC-based industry for no more than two years.
𝑇𝑁𝐼𝐶_𝑆𝑡𝑎𝑏𝑙𝑒 , A dummy variable taking value of one if focal firm i in fiscal year t belongs to the
TNIC-based industry whose standard deviation of incumbents’ sales revenue is
below the industry median of sales revenue over the past ten fiscal years from t-9
to t, and zero otherwise.
𝑆𝑖𝑧𝑒 , Natural logarithm of focal firm i’s total assets in fiscal year t.
45
𝐵𝑖𝑔𝑁 , A dummy variable taking value of one if focal firm i has a Big N auditor in fiscal
year t, and zero otherwise.
𝑀𝐴𝑑𝑢𝑚 , A dummy variable taking value of one if focal firm i undertakes M&A activities
in fiscal year t+1, and zero otherwise.
𝑆𝐸𝑂𝑑𝑢𝑚 , A dummy variable taking value of one if seasoned equity offering of focal firm i
occurs in fiscal year t+1, and zero otherwise.
𝑅𝑒𝑡𝑣𝑜𝑙 , The standard deviation of focal firm i's monthly stock return across fiscal year t.
𝐸𝑎𝑟𝑛𝑣𝑜𝑙 , The standard deviation of focal firm i’s earnings before extraordinary items across
the past five fiscal years from t-4 to t. I also require that there are at least three
firm-year observations in this five-year period.
𝐿𝑒𝑣 , Focal firm i’s total liabilities net of its deferred taxes, divided by its total assets in
fiscal year t.
𝐼𝑛𝑠𝑂𝑤𝑛 , The proportion of focal firm i’s shares owned by institutional shareholders in fiscal
year t.
𝑀𝐵 , The ratio of focal firm i’s market value of equity (focal firm i’s closing price at
the end of fiscal year t multiplying common shares used to calculate EPS) plus
book value of focal firm i’s total liabilities to its book value of total assets in fiscal
year t.
𝐶𝑜𝑣𝑒𝑟𝑎𝑔𝑒 , The average number of analysts who follow focal firm i and make analyst earnings
forecasts on focal firm i during fiscal year t.
𝑂𝑝𝑡𝑖𝑚𝑖𝑠𝑚 , The difference between consensus EPS forecast at the beginning of fiscal year t
and focal firm i’s actual EPS in fiscal year t, scaled by the absolute value of this
actual EPS.
𝑅𝑒𝑡 , Focal firm i’s 12-month buy-and-hold stock return net of the CRSP value-
weighted stock return across fiscal year t.
𝐸𝑃𝑆𝑐ℎ𝑎𝑛𝑔𝑒 , The absolute value of focal firm i’s change in EPS across fiscal year t, scaled by
its stock price at the beginning of fiscal year t.
Variables used in Robustness Tests and Additional Tests
𝑇𝑟𝑒𝑎𝑡 A dummy variable taking value of one if focal firm i is in the treatment group, and
zero otherwise. The treatment group contains firms with competitors whose
foreign income accounts for at least an average of 67% of pre-tax income over
2001–2003.
𝑃𝑜𝑠𝑡 A dummy variable taking value of one if focal firm i is in the post AJCA period
over 2004–2006, and zero otherwise.
𝑃𝑟𝑒_𝑐𝑐𝑜𝑛𝑠𝑡 A dummy variable taking value of one if focal firm i’s average competitors’
financial constraints rank above the third quartile of Cconst over 2001-2003.
𝑆𝐴_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ Size-Age index, summating focal firm i’s
each competitor j’s standardized Size-Age index in fiscal year t-1, divided by the
number of competitors that focal firm i has in fiscal year t-1.
𝑊𝑊_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ Whited-Wu index, summating focal firm i’s
each competitor j’s standardized Whited-Wu index in fiscal year t-1, divided by
the number of competitors that focal firm i has in fiscal year t-1.
𝐷𝑒𝑙𝑎𝑦_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ Delay index, summating focal firm i’s each
competitor j’s standardized Delay index in fiscal year t-1, divided by the number
of competitors that focal firm i has in fiscal year t-1.
𝑆𝑎𝑙𝑒_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ total sales, summating focal firm i’s each
competitor j’s natural logarithm of total sales in fiscal year t-1, divided by the
𝑀𝐵_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ market-to-book ratio, summating focal firm
i’s each competitor j’s market-to-book ratio of total assets in fiscal year t-1,
divided by the number of competitors that focal firm i has in fiscal year t-1. Each
competitor j’s market-to-book ratio is competitor j’s market value of equity
(competitor j’s closing price at the end of fiscal year t multiplying common shares
used to calculate EPS) plus book value of competitor j’s total liabilities to its book
value of total assets in fiscal year t-1.
46
𝐸𝐵𝐼𝑇_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ earnings before interests, summating focal
firm i’s each competitor j’s earnings before interests scaled by its total assets in
fiscal year t-1, divided by the number of competitors that focal firm i has in fiscal
year t-1.
𝑃𝑃𝐸_𝑐𝑜𝑚𝑝 , A composite measure of competitors’ PPE, summating focal firm i’s each
competitor j’s net PPE scaled by its total assets in fiscal year t-1, divided by the
𝑃𝐶𝑇𝐶𝑂𝑀𝑃 , Managements’ perceived intensity of competition as revealed in a firm’s 10-K. It
is defined as the percentage of competition-related words in the firm’s 10-K (Li
et al., 2013). The data are available at http:// webuser.bus.umich.edu/feng/
𝐹𝑜𝑔 , The Gunning-Fog index of the focal firm i’s 10-K in fiscal year t.
𝐿𝑛𝑊𝐷𝑆 , The natural logarithm of (1+WDS), where WDS is the total word count divided
by the total number of sentences in the focal firm i’s 10-K in fiscal year t.
𝐿𝑛𝑊𝐷 , The natural logarithm of (1+WD), where WD is the total word count in the focal
firm i’s 10-K in fiscal year t.
𝐿𝑛𝑆𝐶𝐸 , The natural logarithm of (1+SCE), where SCE is the total number of sentences in
the focal firm i’s 10-K in fiscal year t.
47

Do Competitors' Financial Constraints Affect Corporate Disclosure

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Do Competitors’ Financial Constraints Affect Corporate Disclosure?

Keywords: Competitors’ financial constraints; corporate disclosure; proprietary costs of

JEL classification: D82; G30; L1; M41.

barrier to more voluntary disclosure.”

Theory on corporate disclosure often considers disclosure choices as a trade-off between

in the product market. Empirical studies, in an attempt to capture proprietary costs of

Prior literature provides strong evidence that constraints on financial resources

corporate innovations. Specifically, we regress measures of corporate disclosure on lagged

competitors’ financial constraints. We employ a text-based measure to identify time-variant

examine various types of voluntary disclosure, including disclosure of customer-related

percentage of unidentified customers in a disclosing firm’s segment reporting and the

percentage of sales attributable to unidentified customers. Competitors’ financial constraints

of rivals earning significant foreign incomes. Employing a difference-in-differences design, we

constrained competitors before the enactment of the AJCA decreased customer-information

benefits in the capital market. Further, we examine whether disclosure-related regulations

negatively associated with management’s discussion of competitive environment in 10-K

low proprietary costs of disclosure from observing financially constrained rivals.

costs of disclosure. Prior studies measure product-market-related proprietary costs of

to take advantage of a focal firm’s proprietary information. Prior theoretical works on

proprietary costs of disclosure typically model managers’ disclosure decisions after

(Lang and Sul, 2014; Huang et al., 2017; Li et al., 2018).

Second, we contribute to the literature on product market competition and corporate

disclosure by adopting a measure of time-variant competitive pressure on a focal firm. Our

to move beyond a static measure of industry characteristics by utilizing regulatory changes

enforcement of noncompete agreements (Aobdia, 2018). Our approach instead focuses on

results for additional tests. Section 7 concludes the paper.

2. Related Literature and Hypothesis Development

2.1 Product Market Competition and Corporate Disclosure

motivating financially constrained firms to withhold disclosure of financial statements. Huang

competitors’ access to confidential information, firms reduce disclosure of customer identity

information. Aobdia (2018) finds that a state’s enforcement of noncompete agreements

characteristics, and external shocks to proprietary costs of disclosure on corporate disclosure,

firms’ disclosure is affected by competitors’ ability to react to disclosed information, as

influenced by competitors’ financial capacity.

2.2 Financial Constraints and Product Market Competition

effect of financial constraints on the likelihood of firms engaging in innovative activities.

compete more aggressively.

to consider corporate disclosure decisions.

2.3 Hypothesis Development

Managers in disclosing firms closely monitor competing firms’ financial conditions

of relatively higher financial constraints.

existence of potential mitigating effects, we state our hypothesis as follows:

focal firms’ disclosure levels.

3.1 Measures of Corporate Disclosure

relevant information in a timely manner. Given the multidimensional feature of corporate

of corporate voluntary disclosure. Specifically, in our main analysis, we measure a firm’s

3.1.1 Nondisclosure of Customer Identity Information

customers in the product market, customer-related information is useful to rival firms.

Consistenting Li et al. (2018), we construct two measures of nondisclosure of customer

the proportion of sales attributable to unidentifiable customers.

3.1.2 Management Earnings Forecasts

Management earnings forecasts are voluntary disclosures of forward-looking

3.1.3 Corporate 8-K Filings

2019). Proprietary information contained in 8-K filings, such as termination or initiation of

that a focal firm i files with SEC during fiscal year t.

3.1.4 Firm-initiated Press Releases

Firm-initiated press releases contain factual business information (e.g., business

i issues during fiscal year t.

3.2 Measure of Competitors’ Financial Constraints

Following Grieser and Liu (2019), we construct competitors’ composite financial

the Hoberg–Phillips Data Library.4

Second, we measure each competitor’s financial constraint by averaging three constraint