Breaking it Down: Competitive Costs of Cost Disclosures

Does decomposing cost of goods sold entail significant competitive costs? We examine this question using a relaxation of disaggregated manufacturing cost disclosure requirements in Korea. Our survey evidence indicates managers perceive these disclosures to provide a competitive edge to competitors. Using archival data, we find firms with distinctive cost structures and high market shares are less willing to disclose, consistent with a desire to protect cost-leadership advantages embedded in production and sourcing. Firms experience higher gross profits and lower liquidity after withholding manufacturing cost details, suggesting these disclosure decisions involve trading off competitive costs (and not managers’ self-interests) against capital market benefits. At the aggregate level, industries with more nondisclosing firms subsequently experience greater profitability dispersion, suggesting uncertainty about competitors’ cost of goods sold helps drive the widely studied performance dispersion observed within industries.