Corporate Disclosure as a Tacit Coordination Mechanism: Evidence from Cartel Enforcement Regulations

Financial market regulation has been strengthening over time. Legislation such as Regulation FD and the Sarbanes–Oxley Act have mandated that publicly listed firms increase transparency by disclosing more information in their financial statements. Such disclosure reduces the cost of capital, levels the information playing field for different investors, and allows investors to monitor managers more efficiently through reduced information asymmetry (Leuz and Wysocki [2016], Goldstein and Yang [2017]). However, transparency can come at a cost to consumers in product markets. Indeed, regulators have been expressing concerns about unintended product-market consequences of increasing transparency in financial markets, as doing so could provide firms with ways to coordinate product-market actions.

In this paper, we aim to shed light on this unexplored cost of transparency in financial markets by examining empirically whether firms use disclosure targeted at investors in order to coordinate actions in product markets. As firms have imperfect information about rival behavior (Green and Porter [1984]), the observability of each other’s past, current, and expected future actions, expressed through public financial disclosure, can help them stabilize the cartels. For instance, such disclosure can suggest a collusive price and help monitor whether colluding peer firms have deviated from that price. Such publicly verifiable information is even more important when there is no direct communication between firms, that is, when firms are engaged in tacit collusion arrangements.

We empirically study how collusion in product markets affects firms’ financial disclosure strategies. We find that after a rise in cartel enforcement, U.S. firms start sharing more detailed information in their financial disclosure about their customers, contracts, and products. This new information potentially benefits peers by helping to tacitly coordinate actions in product markets. Indeed, changes in disclosure are associated with higher future profitability. Our results highlight the potential conflict between securities and antitrust regulations.