Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures

89 Pages Posted: 25 Apr 2019 Last revised: 4 Apr 2022

See all articles by Philip G. Berger

Philip G. Berger

University of Chicago - Booth School of Business

Jung Ho Choi

Stanford University Graduate School of Business

Sorabh Tomar

Southern Methodist University (SMU) - Accounting Department

Date Written: March 21, 2022

Abstract

Motivated by the FASB’s project about the disaggregation of performance information, 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 7.8%. Our industry-focused results suggest that withholding affects profitability by reducing information flows between peer firms. We then document a range of evidence consistent with the idea that firms withhold disaggregating CoS to protect cost-innovations from rivals. First, we document efficiency gains following withholding of disaggregated CoS. Second, 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. Third, our survey-experiment of 1,257 US public firms’ 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, Performance, Performance dispersion, Proprietary costs, Voluntary disclosure

JEL Classification: D40, D80, L15, M40

Suggested Citation

Berger, Philip G. and Choi, Jung Ho and Tomar, Sorabh, Breaking it Down: Economic Consequences of Disaggregated Cost Disclosures (March 21, 2022). Stanford University Graduate School of Business Research Paper No. 19-23, Available at SSRN: https://ssrn.com/abstract=3358435 or http://dx.doi.org/10.2139/ssrn.3358435

Philip G. Berger

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-8687 (Phone)
773-834-4585 (Fax)

Jung Ho Choi (Contact Author)

Stanford University Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
(650)721-8434 (Phone)

Sorabh Tomar

Southern Methodist University (SMU) - Accounting Department ( email )

United States

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