Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures

Philip G. Berger (), Jung Ho Choi () and Sorabh Tomar ()
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Philip G. Berger: Booth School of Business, University of Chicago, Chicago, Illinois 60637
Jung Ho Choi: Stanford Graduate School of Business, Stanford University, Stanford, California 94305
Sorabh Tomar: Cox School of Business, Southern Methodist University, Dallas, Texas 75275

Management Science, 2024, vol. 70, issue 3, 1374-1393

Abstract: Motivated by the Financial Accounting Standards Board’s project on the disaggregation of income statement expenses, we study a Korean rule change that allowed firms to withhold a previously mandated disaggregation of cost of sales (CoS). We find that after withholding, firms’ profitability increases by 1.6 percentage points. Our industry-focused results suggest that withholding affects profitability by reducing the transfer of competitive information to peer firms. We then document a range of evidence consistent with the idea that firms withhold disaggregated CoS to protect cost innovations from rivals. First, we construct a novel measure of firms’ cost-innovative potential and show that it predicts withholding and subsequent profitability gains under the voluntary disclosure regime. Second, we document efficiency gains following the withholding of disaggregated CoS. Third, our survey experiment of 1,257 U.S. public firm managers shows that they would reduce investments in process/cost innovations if they were required to disaggregate CoS. Our study highlights to standard setters and academics that CoS disaggregation entails operational consequences for firms.

Keywords: competition; cost innovation; cost structure; disaggregated cost disclosure; process innovation; performance dispersion; proprietary costs; voluntary disclosure (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:70:y:2024:i:3:p:1374-1393

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