Faculty of law blogs / UNIVERSITY OF OXFORD

Is the Cost of Transparency in Financial Markets Corporate Collusion? Examining Whether Corporate Disclosures and Earnings Calls Serve as Coordination Devices


Thomas Bourveau
Assistant Professor of Accounting at Columbia Business School
Guoman She
Assistant Professor of Accounting at the University of Hong Kong
Alminas Žaldokas
Associate Professor of Finance at the Hong Kong University of Science and Technology

In an earnings conference call with investors in 2008, Edward J Shoen, chief executive officer and chairman of U-Haul International, Inc., lamented that the Avis Budget Group, Inc., its main competition in one-way, do-it-yourself moving rental trucks, had failed to match U-Haul’s recent decision to raise prices. Calling the lack of response ‘unfortunate for the entire industry’, Shoen said, ‘U-Haul will wait a while longer for Budget to respond appropriately. Otherwise, it will drop its rates.’ Eighteen months later, U-Haul and its parent company, AMERCO, settled US Federal Trade Commission charges of attempting to collude on a ‘price-fixing plan’ that could have imposed higher prices on consumers.

The U-Haul case illustrates an issue that is emerging in the wake of increased financial disclosure requirements that are a key feature of strengthened financial market regulations worldwide.

Legislation—such as the U.S. Securities and Exchange Commission (SEC) Regulation Fair Disclosure and the Sarbanes-Oxley Act—mandates 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 efficiency through reduced information asymmetry.

However, as the U-Haul case suggests, transparency has the potential to cost to consumers in product markets. In a policy roundtable, the Organisation for Economic Co-operation and Development Competition Committee, for example, recognized this tension, noting that greater transparency may enhance competition or, to the contrary, produce anticompetitive effects by facilitating collusion.

In a recent paper, we empirically examine a potential cost of transparency in financial markets by looking at whether firms use disclosure targeted at investors as a means to coordinate actions in product markets.

Our research focuses on 1,605 US publicly listed companies and spans a period from 1994 to 2012, when countries worldwide began adopting leniency laws that make it easier for firms to receive amnesty if they submit evidence about their complicity in cartels.

We explore changes that occur when antitrust authorities gain more power to detect price-fixing activities through these laws, which make explicit collusion more costly and, as a result, arguably make tacit collusion via public communication a more profitable strategy. We document a decline in the profit margins, equity returns, and product prices of the affected US firms following the passage of such laws—supporting the premise that the increased costs of collusion in the wake of these laws lead to stronger product-market competition.

But we also find that, following these laws, firms change how they communicate about their customers and product pricing in their financial disclosure documents such as the SEC financial disclosure filings and the conversation in corporate earnings conference calls.

In terms of SEC financial disclosure filings, our work shows that, after leniency laws are implemented, firms became less inclined to request confidential treatment of content regarding customer contracts and other matters such as transaction volumes, locations, and product pricing and quality issues that they consider to be proprietary. This is the information that rivals might use to form and coordinate their own product strategies.

For example, following the 1999 passage of Canada’s leniency program, to which the pharmaceutical industry was exposed, three US pharmaceutical companies stopped redacting sales contracts. Similarly, following the 2005 passage of Japan’s leniency program, to which the storage device industry was exposed, two US manufacturers of storage devices stopped redacting sales contracts. We find that adoption of a leniency law explains, on average, 19 percent of within-firm variance of redaction in disclosure forms filed for these most exposed industries.

In addition, we investigate the content of conference calls with equity analysts and, similarly to the U-Haul example, find that exposed firms exhibit greater frequency of the uses of product-market-related words and more discussion of product-market strategies.

The change in disclosure is more pronounced in certain types businesses:

  • industries that are more likely to engage in collusion (eg, concentrated industries with more homogeneous products or industries with higher entry costs);
  • industries that are better able to sustain coordination using unilateral disclosure (those with a higher prevalence of publicly listed firms); and
  • larger firms that are more likely to be industry leaders.

Over the past decade, this potential for corporate financial disclosure to serve as a way to coordinate product-market action has begun to gain greater attention—from regulators, legal advisers, and researchers. In the wake of the U-Haul settlement, for example, Mayer Brown, the global legal firm, wrote an article highlighting the trend of antitrust claims based on public disclosures and outlined practical suggestions to companies striving to limit their potential antirust liability.

Using disclosures as a tacit collusion tactic has economic consequences. We find that, following the passage of foreign leniency laws, firms that adapt disclosure strategies by increasing product-mark-related communication experience only a very modest drop in profitability, while the profitability of the firms that do not change their disclosure suffers substantially. This finding suggests that the change in disclosure allows firms to coordinate to maintain a level of profitability higher than that of a more competitive market.

Our findings have important policy implications given the legal and policy debates on the conflict between antitrust and securities legislation. They also lend support to calls for more regulatory cooperation. The results provide evidence of the conflict between securities and antitrust regulations and underscore that financial disclosure rules should take into account the potential ramifications on antitrust enforcement.

Thomas Bourveau is an Assistant Professor of Accounting at Columbia Business School.

Guoman She is an Assistant Professor of Accounting at the University of Hong Kong.

Alminas Žaldokas is an Associate Professor of Finance at the Hong Kong University of Science and Technology.


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