1
Breaking it Down: Competitive Costs of Cost Disclosures
Philip G. Berger, Jung Ho Choi, and Sorabh Tomar *
June 9, 2019
Abstract
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.
JEL Classification: D40, D80, L15, M40
Key Words: Competition, Disaggregated cost disclosure, Manufacturing cost structure,
Profitability dispersion, Proprietary cost, Voluntary disclosure
University of Chicago Booth School of Business. Jung Ho Choi is from the Stanford Graduate School of Business.
Sorabh Tomar is from Southern Methodist University Cox School of Business. We thank Ray Ball, Pietro Bonetti,
Matthias Breuer, Ben Charoenwong, Hans Christensen, Pingyang Gao, Rachel Geoffroy, Indranil Goswami, Seok
Woo Jeong, Sakong Jung, Jaewoo Kim, In-Mook Ko, Heemin Lee, Jay Junghun Lee (discussant), Edith Leung, Brett
Lombardi, Gregor Matvos, Mike Minnis, Xiaoshan Peng, Haresh Sapra, Doug Skinner, Chad Syverson, Tarik Umar,
Jing Wu, Luyi Yang, Stephen Zeff, and Frank Zhou, as well as workshop participants at the American Accounting
Association annual meetings, Cornell University, London School of Economics and Political Science, Rice
University, Southern Methodist University, University of Chicago, and University of Washington. Any remaining
errors are our own. We greatly appreciate the Korea Investor Relations Service for cooperating with the survey, and
Nicholas Hall and Ido Spector for assisting with the survey. We gratefully acknowledge financial support from the
University of Chicago Booth School of Business, the Stanford Graduate School of Business, and Southern Methodist
University Cox School of Business.
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1. Introduction
Cost minimization is an essential part of profit maximization. If cost minimization is
subject to frictions, then information about competitors’ costs may play a key role in shaping
competitive outcomes. Although cost disclosures may thus help determine competition, the
empirical accounting is largely silent on the impact of disclosure about a firm’s cost of goods sold
(COGS).
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The omission is notable because COGS is typically the largest expense on
manufacturers’ and retailers’ income statements, disclosed information about it has important
implications for firm performance and industry competition, and it is closely tied to firms’
production and activities (e.g., Baron and Myerson 1982; Cohen 2010; Mussa and Rosen 1978;
Shapiro 1986). We therefore investigate how competitive costs, managers’ self-interests, and
capital market benefits influence voluntary disaggregation decisions about COGS, and the
economic consequences of these decisions at the firm and industry levels.
2
We examine Schedule of Manufacturing Costs (henceforth SoMC) disclosures, which were
mandatory for Korean public firms before 2004, and voluntary thereafter. This setting has
appealing characteristics for examining cost disclosures. First, a firm’s SoMC details its cost
structure with considerably more granularity than 10-K cost disclosures do. As such, SoMCs are
informative about firms’ production and sourcing activities in ways not applicable to other settings.
For example, we are able to produce a novel proprietary cost measure intimately tied to the SoMC:
cost structure distinctiveness, which measures how much a firm’s cost structure deviates from its
1
While researchers have examined voluntary disclosures that incorporate cost information (e.g., Dedman and Lennox
2009), these disclosures also include revenue information, making it difficult to discern which type of information
drives the results.
2
We view competitive costs to be a subset of proprietary costs. Competitive costs of disclosure derive from intensified
competition from industry peers. Proprietary costs of disclosure encompass these, as well as loss of bargaining power
within the supply chain.
3
industry’s norm in terms of portions of spending on labor, materials and overhead. Second, our
setting features a change in disclosure regime, allowing us to form inferences about the economic
consequences of voluntary disclosure decisions.
3
Finally, we observe public SoMC disclosures
for a selected set of private firms, helping us to separate the roles of competitive costs and capital
market benefits of disclosure more cleanly than is possible in settings with only public firm
disclosures (e.g., Berger 2011; Dedman and Lennox 2009).
Our conversations with operational-level managers in Korea help illustrate how a firm
might use its competitors’ SoMC disclosures. These managers use disclosed information to
determine where competitors’ cost-leadership advantages lie, and which of their firms’ own cost-
leadership advantages are under threat. For instance, a Korean firm learning its raw material costs
are high relative to its competitors’ may attempt to find alternative vendors from low cost countries
or to increase vertical integration of its supply chain. Learning of higher relative labor costs
suggests a need to improve employee productivity, move production offshore, or outsource
activities. Disaggregation of competitors’ COGS can help firms identify which of their raw
material, labor and overhead costs might be wasteful. Potential entrants can also use incumbents’
SoMCs to understand feasible cost structures for entry.
We propose and examine two hypotheses about firms’ propensity to disaggregate COGS
and disclose the SoMC under the voluntary disclosure regime. First, distinctive cost structure
firms are more likely to withhold their SoMCs, reducing the ability of competitors to appropriate
any cost-leadership advantages these firms’ distinctive cost structures reflect. Second, high-
3
Further, the switch was from mandatory to voluntary disclosure, and thus firms’ internal information environments
likely remained the same. When moving from a voluntary to mandatory disclosure regime, however, there is not only
a disclosure effect, but also an internal information environment effect as firms implement the requisite reporting
infrastructure to comply with the mandate.
4
market share firms are more likely to withhold the SoMC, reducing the ability of competitors to
uncover any competitive advantages that drive higher market share.
We find that one standard deviation increases in cost structure distinctiveness and market
share reduce SoMC disclosure propensity by 6.3% and 4.7%, respectively. Importantly, we find
cost structure distinctiveness and market share also reduce SoMC disclosure propensity for private
firms, providing reassurance that our results are not driven purely by capital market benefits (e.g.,
Ball and Shivakumar 2005; Burgstahler, Hail and Leuz 2006).
Having established competitive cost motivations for non-disclosure, we then examine firm-
level economic consequences of the choice to withhold the SoMC and not disaggregate COGS.
We find gross profits increase by 6.3% and stock liquidity decreases by 8.5% for public firms
withholding the SoMC, relative to those outcomes for public firms disclosing the SoMC, consistent
with a tradeoff between competitive costs and capital market benefits of disclosure.
4
The relative
increase in gross profits for non-disclosers is inconsistent with a managerial private benefit
motivation for withholding the SoMC.
To further check the plausibility of the economic consequence results above, and of our
cost structure distinctiveness measure, we survey managers of public firms in Korea. The results,
based on 32 respondents, indicate that annual reports are the most important information source
for competitor analysis by managers. Managers view peer firms’ cost structures as influential in
production and sourcing decisions, and the majority of managers agree that their SoMC provides
valuable, actionable information for competitor analysis, cannot be reproduced from other
information sources, and gives competitors a significant advantage when disclosed.
4
The percentage increase in gross profits is relative to the mean of gross profits in Panel B of Table 2. The percentage
decrease in liquidity comes directly from Table 6 because illiquidity is measured as a logarithm.
5
Having documented firm-level determinants and economic consequences of SoMC
disclosure, we turn our attention to the industry-level impact of these decisions given that
competition is an industry-level outcome shaped by firm-level decisions. If firms withholding the
SoMC can better shield new and existing cost-leadership advantages in production activities from
appropriation by competitors, we expect to see industry profitability dispersion grow as more firms
in an industry begin withholding the SoMC. Consistent with this hypothesis, a one standard
deviation increase in the percentage of an industry’s firms withholding the SoMC is associated
with a 5.9% increase in that industry’s subsequent gross profit dispersion.
5
This result has ties to
the industrial organization literature attempting to explain the widespread, persistent productivity
and profitability differences observed across firms within the same industries (e.g., Bartelsman,
Haltiwanger and Scarpetta 2013; Breuer 2018; Syverson 2011). Specifically, it suggests
uncertainty about competitors’ COGS helps drive these differences in manufacturing industries.
Our study provides three contributions. First, we provide evidence that disclosures about
firms’ cost structures entail significant competitive costs, consistent with these disclosures being
informative about firms’ production and sourcing activities. Despite the theoretical importance of
cost information in shaping competition (e.g., Baron and Myerson 1982; Cohen 2010; Mussa and
Rosen 1978; Shapiro 1986), the empirical literature examining competitive costs of disclosure has
largely focused on disclosures about summary financial performance and product markets (see
Section 3.2.2.1 of Beyer, Cohen, Lys and Walther (2010) for a review).
6
Moreover, examining a
5
The standard deviation of the percentage of firms withholding the SoMC in an industry in 2004 is 16.7%. The
absolute increase in profitability dispersion due to a one standard deviation increase in the percentage of firms
withholding the SoMC in an industry is 0.6%=16.7%*0.0371. 5.9% is relative to the mean of profitability dispersion,
10.5%.
6
A mere sampling includes Ali, Klasa and Yeung (2014), Bens, Berger and Monahan (2011), Berger and Hann (2007),
Bernard (2016), Bhojraj, Blacconiere and D’Souza (2004), Botosan and Harris (2000), Dedman and Lennox (2009),
Ellis and Fee (2012), Guo, Lev and Zhou (2004), Harris (1998), Huang and Li (2014), Jin (2005), Li (2010), Li, Lin
and Zhang (2018), Meek, Roberts and Gray (1995), Scott (1994), and Verrechia and Weber (2006).
6
disclosure regime change lets us highlight competitive costs of disclosing cost information from
both a determinants of disclosure and an economic consequences perspective. Bernard (2016) and
Guo, Lev and Zhou (2004) also examine competitive costs from these dual perspectives, albeit in
highly specialized settings of product market predation and biotechnology IPOs. Our setting
examines manufacturing industry competition, which is important both within and across most
developed economies, yet the setting also has features that let us perform the difficult task of
distinguishing competitive concerns, capital market benefits, and managerial private benefit
motivations in making cost disclosure choices (Berger 2011; Dedman and Lennox 2009).
Second, we add to the literature exploring disaggregation of financial statement
information by examining outcomes surrounding decomposition of COGS. IFRS and US GAAP
provide little specific guidance about the granularity of financial statement line items. There is
also a broader debate by standard setters about disaggregation in financial reporting, as evidenced
by the Financial Accounting Standards Board’s focus on disaggregation in its long-running
Financial Performance Reporting Project. The handful of studies in this area examine
disaggregation at the firm or operating segment level, with less regard given to the specific
information unlocked by disaggregation (e.g., Berger and Hann 2007; Bens, Berger and Monahan
2011; Chen, Miao and Shevlin 2015; Hoitash and Hoitash 2018). In contrast, we focus on the
disaggregation of a single, major line item: COGS. This focus lets us exploit the information made
available by disaggregation and construct a measure capturing a new dimension of firm
differentiation: cost structure distinctiveness. The literature has typically examined firm
differentiation in terms of product markets and geography.
Lastly, by analyzing industry-level profitability dispersion, our study links to the industrial
organization literature exploring the ubiquitous productivity and profitability dispersion
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phenomenon (e.g., Bartelsman, Haltiwanger and Scarpetta 2013; Breuer 2018; Griffith, Haskel
and Neely 2006; Syverson 2004; Syverson 2011). This literature shows that the gap in
performance between top and bottom performers in narrowly defined (e.g., 4-digit SIC code)
industries is much larger than traditional views of economic competition predict. Thus, firms may
face large frictions in attempting to emulate their more successful peers within most industries.
Management practices, product market competition and information technology are
examples of factors explaining part of this dispersion, though the majority of it remains
unexplained. Recent studies suggest financial reporting and attestation also affect this dispersion
by improving the allocation of resources in capital markets and improving internal decision making
(e.g., Barrios, Lisowsky and Minnis 2019; Choi 2018; Hann, Kim, Wang and Zheng 2018). We
provide evidence that withholding disaggregated COGS information from competitors helps firms
maintain competitive advantages in production and sourcing activities, contributing to profitability
dispersion within industries. In other words, higher quality financial disclosure is associated with
lower within-industry profitability dispersion. This is in keeping with Breuer (2018), who
documents that mandatory reporting reduces profitability dispersion, but does not increase
economic growth—he suggests reporting regulation facilitates dissemination of proprietary
information, which stifles ex-ante incentives to innovate.
Before proceeding, a note on generalizability beyond Korea is in order. We note that the
manufacturing sector plays an important role in most advanced economies.
7
Moreover,
competitive concerns related to cost structures are widely discussed by firm executives, politicians
and policy-makers in the world’s leading economies and their multinational organizations (such
7
In 2004, manufacturing contributed 28.5%, 13.5%, and 17.7% (unweighted average) to value added in Korea, the
US and OECD countries. Source: https://data.oecd.org/natincome/value-added-by-activity.htm.
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as the OECD).
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Finally, productivity and profitability dispersion are phenomena observed
globally, giving our industry-level results and their implications the same broad applicability as
our firm-level findings.
The next section presents the institutional background. Section 3 describes the hypothesis
development, Section 4 the data and research design, and Section 5 our empirical results. Section
6 concludes.
2. Institutional Background
2.1. The Schedule of Manufacturing Costs
Until 2003, the Korean Financial Supervisory Commission (KFSC) required Korean pubic
firms to disclose a Schedule of Manufacturing Costs (SoMC) along with their annual reports.
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The
SoMC decomposes manufacturing costs into specific components grouped under Raw Material
Costs, Labor Costs, and Overhead Costs. Appendix B contrasts the SoMC of Hyundai Motor
Company (a Korean firm) with the 10-K automotive cost of sales discussion of General Motors (a
US company)—Hyundai’s SoMC provides far more detail about its production process and
specific costs than General Motors’ 10-K discussion does.
Although Korean public firms must report information about manufacturing costs in other
parts of their annual reports, evidence suggests these sources compose an imperfect substitute for
8
E.g., The US Department of Justice and Federal Trade Commission’s Antitrust Guidelines for Collaborations Among
Competitors states “Other things being equal, the sharing of information relating to price, output, costs, or strategic
planning is more likely to raise competitive concern than the sharing of information relating to less competitively
sensitive variables.”
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Formed in 1998, the KFSC was responsible for promulgating financial regulation, and for oversight of financial
institutions. In 1999, the Korean Financial Supervisory Service (KFSS) was established and placed under the KFSC’s
oversight. The KFSS was the integrated regulator of four domains previously regulated by different bodies: banking,
insurance, securities, and other financial sectors. One of the KFSS’s responsibilities was overseeing firms’ compliance
with the KFSC’s SoMC disclosure requirements. The KFSC became the Korean Financial Services Commission in
2008 after the Supervisory Commission merged with a portion of the Ministry of Finance and Economy. The merger
expanded the scope of the Services Commission relative to the Supervisory Commission.
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SoMC information because they are more aggregated and less complete. For instance, major
purchases of raw materials must be separately reported, but firms are able to exert significant
discretion over what is considered major and over the extent of aggregation. For tax purposes,
firms must report total salaries, retirement allowances, employee benefits, rent, and taxes and dues
included in manufacturing costs. These items are collectively narrower in scope than the SoMC,
however, making the SoMC incrementally informative.
To provide evidence on the potential for disclosure of manufacturing cost reports to create
competitive costs, we surveyed managers working for public Korean firms.
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The results, based
on 32 responses, indicate that annual reports are the most important information source for
competitor analysis, and that understanding peer firms’ cost structures is important for production
and sourcing decisions. The majority of managers agree their SoMCs would provide valuable
information for competitor analysis beyond other information sources, and would provide
competitors a significant competitive advantage if disclosed.
2.2. Disclosure Regulation Surrounding the Schedule of Manufacturing Costs
In 2004, the KFSC made disclosure of the Schedule of Manufacturing Costs, along with
ten other Schedules, voluntary for public firms. The impetus for this change was the planned
expansion in scope of securities class action lawsuits to cover accounting fraud in annual and
quarterly reports from 2005 onwards. The KFSC argued that the SoMC contains proprietary
information and mandating its disclosure would place an excessive legal burden on public firms
10
We emailed a survey invitation to 410 managers through the Korea Investor Relations Service, LinkedIn, and
additional contacts. We note two caveats. First, the response rate of 8% is lower than the 38% mean participation rate
of surveys in the management accounting literature (Hiebl and Richter 2018), but comparable to Tomy (2019), who
surveys bankers about the link between competitive actions and disclosure choices. The email delivery medium might
be one factor contributing to the low participation rate. Second, we administered this survey in 2018—even though
we ask questions about a disclosure rule change in 2004, survey respondents can use their current knowledge to answer
those questions. Appendix C provides the survey questionnaire and summarizes the results.
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following the expansion in scope of securities class action lawsuits. At the end of 2004, the KFSC
announced and enacted three major changes in disclosure regulation: eliminating some mandatory
disclosure items, such as the SoMC; allowing the use of IFRS or US GAAP; and simplifying other
elements of the disclosure process. Table 1 chronicles this regulatory process.
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[Table 1 about here.]
For private firms, although those considered large (i.e., with assets exceeding seven billion
won) have always been required to disclose audited financial statements, the SoMC has always
been a voluntary disclosure item.
12
As noted above, the relaxation of mandatory SoMC disclosure coincided with similar
relaxations for other schedules, covering receivables, payables, inventories, deposits, securities,
borrowings, bonds, depreciations, and corporate taxes (Hwang and Hong 2004; Kim and Jung
2011). Although these other schedules relate to important accounts, we believe the Schedule of
Manufacturing Costs’ reporting requirement change was the most important among the suite of
disclosure changes because the vast majority of press coverage and discourse among practitioners
focused on the SoMC. Consistent with the lower importance of the other schedules, their presence
in our data set is substantially more incomplete than for the SoMC, even in years where disclosure
was mandatory.
A handful of papers investigate aspects of the SoMC disclosure rule change. Kim, Jung,
Choi and Lee (2016) study determinants of firms’ disclosure choices including leverage, size,
Herfindahl Index, and labor productivity, but do not investigate cost structure distinctiveness,
11
In addition to the KFSC, the Korean Accounting Standards Board (KASB) also oversaw the SoMC. Until 2006,
the KASB had required public and large private firms to prepare the SoMC, but not necessarily disclose it. In 2006,
the KASB withdrew this preparation requirement citing proprietary costs. We focus on the change in SoMC disclosure
requirements promulgated by the KFSC because these were widely viewed as being more substantial.
12
Seven billion won reflects the 2004 threshold.
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customer concentration, market share, or firms’ subsequent performance. Bae, Han, Choi, Noh,
Shin and Li (2013) find capital market benefits of disclosing the SoMC, largely focusing on the
cost of capital. Oh, Park and Jeon (2017) show that the switch to voluntary disclosure impaired
analysts’ earnings forecast accuracy. These findings reinforce that SoMC information cannot be
completely reconstructed from alternative sources.
3. Hypothesis Development
Our broad thesis is that disaggregation of COGS entails significant competitive costs.
Verrecchia (1983) demonstrates that any general voluntary disclosure cost leads to a partial
disclosure equilibrium. One important potential disclosure cost is deterioration in competitive
position from revealing proprietary information, that is, competitive costs. We build on the
industrial organization literature to motivate our specific hypotheses.
3.1. Distinctive Cost Structure Firms
Firms might gain a competitive edge in their industry by implementing cost-leadership
innovations in production and sourcing activities (e.g., Dasgupta and Stiglitz 1980). Firms might
also discover alternative ways to produce the same product, helping them adjust to input market
shocks. Disclosing the Schedule of Manufacturing Costs (SoMC) might facilitate discovery and
appropriation of these innovations by a firm’s competitors (Cohen 2010). Potential entrants can
also use incumbents’ SoMCs to determine the type of cost structures necessary to compete in a
market, resulting in better informed entry decisions.
Hypothesis 1: Firms with more distinctive cost structures are more likely to withhold
the Statement of Manufacturing Costs.
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3.2. High Market Share Firms
High market share firms are plausibly those with the most to lose should they cede their
competitive position. Nickell, Wadhwani and Wall (1992) demonstrate that these firms experience
higher productivity growth, potentially due to cost-competitiveness and technological advances.
High market share firms will be less willing to disclose their SoMCs if competitors can then
discover the sources of their higher productivity.
Hypothesis 2: Firms with higher market share are more likely to withhold the Statement
of Manufacturing Costs.
The nulls for Hypotheses 1 and 2 follow from standard assumptions of cost-minimization
and full, common knowledge about potential cost structures. Absent these assumptions, a potential
countervailing force to proprietary cost motivations for withholding the SoMC is coordination
benefits of disclosure. Pooling cost information can help industries allocate production towards
more efficient firms, and can be mutually desirable for competitors, customers, and suppliers if it
helps them adjust to cost shocks (Armantier and Richard 2003; Li 2002; Ha and Tong 2008;
Shapiro 1986; Vives 1984; Vives 2008). To the extent firms perceive benefits from sharing cost
information with competitors, customers and suppliers, they will tend to disclose the SoMC. If
coordination benefits correlate with cost structure distinctiveness and market share, however, these
benefits might obscure competitive costs’ impact on SoMC disclosure choices. Because
coordination among competitors represents an industry-level disclosure incentive, examining
Hypotheses 1 and 2 across- and within-industries can inform us about such obscuring. The idea is
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that across-industry variation in SoMC disclosure choices captures competitive costs and
coordination benefits, while within-industry variation largely captures competitive costs.
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3.3. Tradeoff between Competitive Costs and Capital Market Benefits
Profit maximizing firms should trade off proprietary costs and capital market benefits when
making voluntary disclosure choices (Boone, Floros and Johnson 2016; Clinch and Verrecchia
1997; Darrough and Stoughton 1990; Leuz 2004; Verrecchia 1983). We expect gross profits to
increase for firms that begin withholding the SoMC, relative to firms that continue disclosing,
because they no longer incur competitive costs of SoMC disclosure. Withholding the SoMC and
not disaggregatings COGS makes it harder for rivals to learn about existing cost-leadership
advantages. Withholding might also spur additional investments in cost reduction that are now
better protected from appropriation by competitors.
We focus on reduced information asymmetry as the capital market benefit of SoMC
disclosure. Although firms can use ex-post discretion to disclose good news, we view the main
decision firms face in our setting as an ex-ante one: whether to adopt a policy of SoMC disclosure
or not. This ex-ante view suggests liquidity as a suitable measure of capital market benefits (Leuz
and Verrecchia 2000). In the same way withholding the SoMC can preserve information
asymmetry between the firm and its competitors, it can also heighten information asymmetry
between informed and uninformed investors about cost components that were previously disclosed
(Badertscher, Shroff and White 2013).
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In addition, antitrust laws limit information sharing between competitors (Vives 2008) and such laws are in place
and enforced in Korea. Furthermore, if there are significant frictions in customer-supplier negotiation, supply-chain
coordination might not be feasible.
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Hypothesis 3-1: Gross profits increase for firms withholding the Schedule of
Manufacturing Costs relative to the gross profits for firms that continue
disclosing the Schedule.
Hypothesis 3-2: Liquidity decreases for firms withholding the Schedule of Manufacturing
Costs.
Hypothesis 3-1 makes a claim about relative gross profits because we do not view SoMC
disclosing firms as providing a counterfactual for SoMC withholding firms had mandatory
disclosure continued. Ideally (and impossibly), we would observe the outcomes for non-disclosing
firms in a world where the SoMC disclosure mandate was not relaxed. This differs from observing
the outcomes for firms that continued disclosing in our setting because these firms are affected by
non-disclosure of their competitors’ SoMCs. In contrast, Hypothesis 3-2 makes a claim about the
level of liquidity because we view a firm’s liquidity as being much less impacted by its
competitors’ SoMC disclosure decisions. Thus, we consider disclosing firms as providing a
counterfactual for withholding firms had mandatory disclosure continued.
Managers may trade off not only competitive costs, but also their own private benefits
against capital market benefits of disclosure. Withholding the SoMC might make it harder for the
firm’s monitors to evaluate a poorly performing manager (Berger and Hann 2007). If private
benefits motivate firms’ SoMC disclosure choices, we expect gross profits to decline for
withholding firms. This is because a manager’s private benefits typically come at the expense of
the firm (Hope and Thomas 2008). Thus, the direction of a firm’s gross profit trend after
withholding the SoMC can help discriminate between the competitive cost and private benefit
motivations for withholding the SoMC. That said, we expect competitive costs to dominate
managerial self-interest motivations as a driver of SoMC disclosure choice because the SoMC is
15
more informative about factory level outcomes rather than corporate level outcomes. Even if firms
withhold the SoMC, shareholders have a range of information sources to help assess whether a
manager is appropriating firm wealth.
3.4. Effect of Manufacturing Cost Disclosures on Performance Dispersion
Absent frictions in input and output markets, competition should largely eliminate the
significant and pervasive productivity and profitability dispersion across firms that is routinely
observed by academics (see Syverson (2011) for a review). In this vein, we posit that if
information barriers about costs can help firms establish and protect competitive advantages as
discussed above, then industries containing more firms withholding the SoMC will exhibit greater
dispersion in firm performance.
Hypothesis 4: An industry’s gross profit dispersion increases as the proportion of its
firms withholding the SoMC increases.
4. Data and Research Design
4.1. Data and Sample Selection
The financial and market data come largely from Kisvalue, a leading credit-rating agency
and data repository for Korean firms’ public disclosures. Kisvalue also provides information
voluntarily reported by subscribing firms, which can be privately owned. Kisvalue’s data are
accessible to any of its subscribers, including academics.
14
IBES provides our analyst data.
Panel A of Table 2 summarizes our sample selection procedure. The base sample
comprises firms listed on the Korea Stock Exchange (KSE) and KOSDAQ that disclosed the
14
We note voluntarily reported data might be less reliable than publicly disclosed data. However, as Gigler (1994)
notes, the trade-off between capital market benefits and proprietary costs of disclosure can make voluntary disclosures
credible.
16
Schedule of Manufacturing Costs (SoMC) in 2003, that have the requisite financial information
from 2003 to 2005, and that do not produce observations in the top or bottom 1% in terms of
independent variables with denominators (such as gross profit and leverage). We then winsorize
the top and bottom 1% of observations in terms of profitability and cost-component variables for
tests spanning multiple years. In Table 4, we bolster our sample with private firms having audited
financial statements that also meet these criteria. While this limits our inferences to private firms
that chose to report the SoMC to Kisvalue in 2003, it also allows us to construct an empirical
measure of cost structure distinctiveness for private firms. In Table 6, which examines the
economic consequences of SoMC disclosure, sample firms must have the requisite financial
information from 2001 to 2007.
[Table 2 about here.]
4.2. Empirical Measures of Competitive Position
We examine two key measures of a firm’s competitive position as it pertains to the SoMC:
its cost structure distinctiveness and market share. Cost structure distinctiveness is the distance of
a firm’s proportions of manufacturing costs driven by raw material (RMC), labor (LC), and
overhead costs (OC) from its industry’s average of these proportions.
where firm i is in industry k and an overbar indicates an industry average. Firms are
assigned to industries by their 3-digit Korean Standard Industrial Classification (KSIC) codes.
Given that private firms voluntarily disclose the SoMC, we exclude them when computing the
industry averages to avoid biasing these averages towards disclosing firms’ characteristics. Cost
17
structure distinctiveness is similar in spirit to other multidimensional firm distance measures, such
as a technological and geographic distance (e.g., Jaffe 1988; Netz and Taylor 2002).
We compute market share by dividing a firm’s sales by its industry’s sales, which
comprises public firms’ and large private firms’ sales.
4.3. Effects of Competitive Position on Manufacturing Cost Disclosure Decisions
We explore the determinants of firms’ SoMC disclosure decisions using the following
linear probability model:
NDMC equals 1 if a firm stops disclosing the schedule of manufacturing costs in 2004,
and 0 otherwise, with β
1
, and β
2
providing inferences about Hypotheses 1 and 2.
A commonly cited concern when interpreting models such as Model (3) is that the choice
to withhold information might be driven by lower capital market benefits rather than by higher
competitive costs. Our setting, however, allows us to estimate Model (3) separately for public
firms and a set of audited private firms that previously voluntarily disclosed the SoMC to Kisvalue
in 2003. The literature has argued that capital market benefits play a relatively insignificant role
in influencing private firms’ disclosure decisions, and thus if β
1
and β
2
are significantly positive
for private firms, this will provide assurance that our public firm results are not purely driven by
variation in capital market benefits (Ball and Shivakumar 2005; Burgstahler et al. 2006).
15
15
Private firms might, however, still derive capital market benefits from disclosure because of venture capitalists.
18
We include a measure of customer concentration to control for proprietary costs related to
supply chain concerns—we consider these costs distinct from competitive costs.
16
Customers and
suppliers often negotiate to determine prices and divide economic surplus. Under standard models,
manufacturers obtain informational rents by not disclosing their private cost structures (e.g., Baron
and Myerson 1982; Mussa and Rosen 1978). We include the Herfindahl Index, PPE entry barriers,
related party sales, and the industry proportion of private firms to control for other dimensions of
competition that might be correlated both with voluntary disclosure decisions, and with cost
structure distinctiveness and market share (Bens et al. 2011; Harris 1998). We do not have
directional expectations about these controls’ coefficient estimates because they depend on the
nature of competition. We include size, leverage, market-to-book, sales growth, gross profits,
analyst following, diversification, foreign sales, and membership in high litigation-risk industries
to control for other supply and demand drivers for voluntary disclosure. These drivers include the
need to secure external financing for growth opportunities, financial schedule preparation costs,
investors’ informational demands, the presence of agency conflicts that can be mitigated by
disclosure, and litigation risk (Berger and Hann 2007; Choi 2014; Frankel, Kothari and Weber
2006; Meek et al. 1995). Appendix A contains variable definitions.
4.4. Tradeoff between Costs and Benefits of Disclosure
We explore the economic consequences of withholding the SoMC and not disaggregating
COGS by estimating the following difference-in-differences model for the years 2002 to 2007:
16
With hand-collected data, we compute customer concentration by dividing a firm’s sales to its three largest
customers (by sales) by its total sales. Public firms were required to disclose statements of accounts receivable from
major customers until 2004, when along with the SoMC such disclosures became voluntary. These statements
typically report beginning balances, increases from new credit sales, decreases from customer payments, and ending
balances for accounts receivable for each major customer; we use the increases from new credit sales as our measure
of sales to a customer. Firms exercise considerable discretion over how they define major customers, and customer
concentration is zero if they report no major customers. In such cases, it is unclear whether firms have no major
customers, or are withholding information about major customers.
19
where NDMC
i
,
t
−
1
indicates if firm i withholds the SoMC in year t−1, γ
i
are firm fixed
effects, and λ
t
are year or year-quarter fixed effects. To interpret β
1
as reflective of competitive
costs or capital market benefits of SoMC disclosure, we need to mitigate the likelihood that
differing characteristics, for instance sales growth, between SoMC disclosing and non-disclosing
firms drive differential patterns in these outcomes.
To alleviate these concerns, we propensity score match our set of SoMC withholding firms
to a set of observably similar SoMC disclosing firms. We one-to-one match firms that stopped
disclosing the SoMC in 2004 to firms that continued disclosing the SoMC in 2004, based on
propensity scores, with replacement and within industry. We require matched firms to have
propensity scores less than 0.25 standard deviations apart (Imbens 2004).
A residual concern is unobservable reverse causality; that is, firms might anticipate future
gross profits, and withhold the SoMC if its disclosure imperils a portion of these profits. Though
still consistent with the competitive cost hypothesis, this would overstate the extent of competitive
costs. We acknowledge that propensity score matching on observables does not address
unobservable anticipation of gross profits.
We include size, leverage, investment, sales growth, and a negative earnings indicator to
control for other drivers of realized and expected gross profits separate from voluntary disclosure
(e.g., Fama and French 1995; Hayashi 1982; Piotroski 2000). In the illiquidity regression tests,
we include size, return volatility, and trading volume to control for other determinants of illiquidity
(Chae 2005, Leuz and Verrecchia 2000).
4.5. Effect of Manufacturing Cost Disclosures on Profitability Dispersion
20
We test whether industries containing more firms withholding the SoMC exhibit greater
dispersion in firm performance by estimating the following industry-year level model for the years
2002 to 2007:
where Ind NDMC is the proportion of an industry’s firms withholding the SoMC.
We choose gross profit dispersion as our measure of performance dispersion as a natural
extension of our firm level tests based on gross profits. We include the following control variables:
the Herfindahl Index to capture non-information-based drivers of competition that might reduce
performance dispersion (e.g., Javorcik 2004; Syverson 2011); industry intangible assets to capture
performance dispersion driven by uncertain processes such as R&D (e.g., Doraszelski and
Jaumandreu 2013); industry leverage to capture financial friction-based entry barriers that allows
incumbents’ performance to become disperse (e.g., Midrigan and Xu 2013); and average firm size
and profitability to capture any mechanical relation between scale and dispersion in an industry’s
profitability.
5. Empirical Results
5.1. Descriptive Statistics
Panel B of Table 2 reports descriptive statistics. Public firms withholding the Schedule of
Manufacturing Costs (SoMC) have more distinctive cost structures and higher market shares than
disclosing public firms. Relative to SoMC disclosers, SoMC withholders are also more likely to
operate in lower PPE entry barrier and lower litigation risk industries, have a lower proportion of
domestic sales, have more gross profits, be larger, be less leveraged, have a higher market-to-book
ratio, and have analyst coverage.
21
Panel C of Table 2 reports the correlation matrix, which shows a number of significant
correlations between our competitive position, industry competition, and other control variables.
While we do our best to isolate the effects of cost structure distinctiveness and market share on the
decision to disclose the SoMC, the reader should bear in mind these correlations when considering
our evidence.
5.2. Competitive Positions, Competitive Costs, and Manufacturing Cost Disclosure
Table 3 provides our main findings. Regarding Hypothesis 1, distinctive cost structure
firms are more likely to withhold the SoMC and not disaggregate COGS, consistent with cost
structure distinctiveness capturing cost-leadership advantages. Column 1 shows a one standard
deviation increase in cost structure distinctiveness increases the propensity to withhold the SoMC
by 6.3%.
17
[Table 3 about here.]
Consistent with Hypothesis 2, high market share firms are more likely to withhold the
SoMC, consistent with both a desire to protect competitive advantages driving their higher
productivity, and with larger potential losses from competitive costs. Column 2 shows a one
standard deviation increase in market share increases the propensity to withhold the SoMC by
4.7%.
In Column 3, the coefficient estimates on distinctive cost structure and market share remain
very similar to those from Columns 1 and 2 when both variables are included together in the
estimation, suggesting these variables capture distinct aspects of competitive cost motivations for
SoMC nondisclosure. Columns 1 to 3 comingle across-industry and within-industry variation in
17
To calculate this number, we multiply the standard deviation of cost structure distinctiveness, 0.1351 in Panel B of
Table 2, by the coefficient of interest, 0.4653, in Column 1 of Table 3. We calculate the economic effect of market
share in the next paragraph in the same way.
22
our variables, and thus industry-level coordination benefits of disclosure might drive part of the
observed relations. Column 4 includes industry fixed effects to alleviate this concern, and by
isolating within-industry variation in our variables, suggests competitive costs of disclosure
significantly affect SoMC disclosure choice.
Given the advent of securities class action lawsuits to Korea in 2005, a potential alternative
explanation for these results is litigation risk; for example, if cost structure distinctiveness captures
operational volatility, disclosure of the SoMC might magnify expected losses from litigation (e.g.,
Kim and Skinner 2012; Lowry and Shu 2002). We note, however, that only five securities class
action lawsuits occurred in Korea from 2005 to 2012, suggesting litigation risk is unlikely large
enough to generate our findings (Choi 2014). In addition, our results in Section 5.4 about gross
profits are unlikely to be driven by litigation risk.
5.3. Competitive Costs and Private Firms’ Manufacturing Cost Disclosure
As discussed in Section 4.3, we examine private firms’ SoMC disclosure choices to address
the concern that distinctive cost structure firms withhold the SoMC because of lower capital
market benefits of disclosure, rather than higher competitive costs of disclosure.
Column 1 of Table 4 reveals that private firms having distinctive cost structures also tend
to withhold the SoMC. Considering arguments in the literature that private firms derive little
capital market benefit from disclosure, this result reduces the concern that cost structure
distinctiveness and market share predict SoMC disclosure choices largely because these variables
capture capital market benefits (e.g., Ball and Shivakumar 2005; Burgstahler et al. 2006). In
addition, private firms are not subject to class action lawsuits in Korea, helping to rule out a
litigation risk explanation for the empirical results in Table 3 (Byun 2014). Although Column 2
shows that industry fixed effects weaken the results for private firms, the positive, insignificant
23
coefficient on distinctive cost structure and positive, weakly significant coefficient on market share
are consistent with competitive cost motivations for withholding the SoMC.
[Table 4 about here.]
5.4. Tradeoff between Competitive Costs and Capital Market Benefits
As discussed in Section 4.4, a concern when examining the economic consequences of
withholding the SoMC is that despite linear controls, differing characteristics between SoMC
disclosing and non-disclosing firms might drive differential patterns in gross profits and liquidity.
We address this issue by propensity score matching the SoMC withholding firms to a set of SoMC
disclosing firms. Table 5 assesses the covariate balance achieved by the matching procedure, and
shows that the two sets of matched firms have similar characteristics.
[Table 5 about here.]
Figure 1 illustrates that gross profit increases and liquidity decreases for firms that stop
disclosing the SoMC in 2004 compared to matched firms that continue disclosing in 2004.
[Figure 1 about here.]
Table 6 corroborates Figure 1. Columns 2 and 4 show gross profit increases 6.3% and
liquidity decreases 8.5% for firms withholding the SoMC, relative to firms disclosing the
SoMC.
18
,
19
These changes are economically significant—the mean gross profit for sample firms
is roughly 20% and the two-way equity trading cost in Korea is 4% (Domowitz, Glen and
Madhavan 2001).
18
Untabulated analyses using the unmatched sample provide similar inferences in terms of economic and statistical
significance, suggesting that observable differences between disclosing and non-disclosing firms are captured
reasonably by linear controls. We again acknowledge, however, that propensity score matching does not address
disclosure choices driven by unobservable anticipation of future profitability.
19
Our test likely violates the Stable Unit Treatment Value Assumption (SUTVA) because firms that withhold their
SoMC might adversely affect the gross profits of SoMC disclosing firms by creating a more opaque industry
information environment. We note, however, that this adverse effect should also spill over to other SoMC withholding
firms in the same industry, reducing the impact of the SUTVA violation.
24
[Table 6 about here.]
Our main takeaway from Table 6 is that its results are consistent with the hypothesis that
managers trade off competitive costs, rather than their own private benefits, against capital market
benefits of SoMC disclosure. By not disaggregating COGS, firms protect proprietary information
about cost-leadership advantages from their competitors. The resulting public information
reduction about costs, however, might worsen information asymmetry between informed and
uninformed investors, reducing liquidity and increasing the cost of capital (Amihud 2002).
5.5. Effect of Manufacturing Cost Disclosures on Profitability Dispersion
Column 2 of Table 7 shows that a one standard deviation increase in the percentage of
firms withholding the SoMC in an industry is associated with an increase in that industry’s
subsequent gross profit dispersion of 5.9% of mean profitability dispersion. This is consistent with
the notion that non-disclosure allows firms to build and maintain cost-leadership advantages in
production and sourcing activities, separating themselves from competitors. The broader
implication is that information barriers between competitors can explain a portion of the persistent
productivity and profitability dispersion documented in prior literature.
[Table 7 about here.]
Comparing the coefficient on Ind NDMC across Columns 1 and 2 shows that relation between
profitability dispersion and the proportion of withholding firms is robust to the inclusion of control
variables argued to drive performance dispersion.
20
20
In an untabulated analysis without industry and year fixed effects, and consistent with our expectations, Herfindahl
Index, Industry Intangible Assets, and Industry Gross Profit are significantly positively related to Gross Profit
Dispersion (as too is Industry NDMC). This is consistent with these controls being slow-moving variables and
Industry NDMC being a fast-moving variable.
25
Borrowing the argument discussed in Section 4.4, an alternative view is that firms which
unobservably anticipate their future gross profits changing also withhold their SoMCs to protect
the competitive advantages driving these changes. This view is consistent with the competitive
cost hypothesis, but could imply an overstatement of SoMC disclosure’s impact on profitability
dispersion.
5.6. Robustness Tests
5.6.1. Competitive Positions, Competitive Costs, and Manufacturing-Cost
Disclosure with Different Specifications
Columns 1 to 6 of Table 8 show that our disclosure determinants results are robust to the
following model specification variations: 1) constructing market share, the Herfindahl Index, and
PPE entry barriers using only public firms—competition might be largely confined to public firms;
2) measuring cost structure distinctiveness as the sum of absolute, rather than squared, differences
from industry averages; 3) measuring customer concentration using a firm’s sales to its top
customer rather than its top three customers; 4) the inclusion of bank fixed effects to control for
the specific capital market benefit of relationship lending (Roberts and Sufi, 2009)—relationship
banks might influence firms’ disclosure decisions, and while we find these fixed effects are jointly
significant, their inclusion does not affect our main inferences; 5) using 4-digit rather than 3-digit
KSIC codes to define industries; and 6) the addition of a Chaebol firm indicator.
21
[Table 8 about here.]
21
Chaebol firms are large, family run conglomerates producing diverse products, and thus their firm-level SoMCs are
likely less actionable by competitors. In addition, Chaebol are known to squeeze out small and medium size rivals.
These features suggest Chaebol face lower competitive costs of SoMC disclosure. On the other hand, Chaebol have
substantial internal capital markets, suggesting they derive lower capital market benefits from disclosure (Campbell
and Keys 2002). We find that Chaebol firms tend to withhold the SoMC.
26
5.6.2. Disclosure Dynamics
Figure 2 illustrates that the proportion of public firms that elected to withhold their SoMC
increased continually by year after 2003, approaching 80% in 2013. By far, the largest increase
occurred in 2004, the first year of the voluntary disclosure regime. Gassen and Muhn (2018)
similarly document a slow uptake of non-disclosure in a field experiment, with their evidence
suggesting that informational constraints (i.e., lack of awareness of disclosure mandate
relaxations) can explain the drift in their very small firm setting. The firms in our setting are much
larger, however, so information constraints seem less likely to bind. An alternative explanation
for the drift in our setting is that firms’ mandated disclosures had set disclosure expectation
precedents for investors, which some firms were initially reluctant to stray from.
[Figure 2 about here.]
To assess whether our results are influenced by these disclosure dynamics, we re-estimate
Model (3) using firms’ SoMC disclosure decisions in 2005 and 2006. Columns 7 and 8 of Table
8 (analogous to Column 3 in Table 3) reveal that firms’ cost structure distinctiveness in 2003 is
positively associated with withholding the SoMC in 2005 and 2006, but the coefficient is
statistically significant only in 2005. We expect this relation to become weaker over time if cost
structures are not completely static—indeed, the autocorrelation of 0.88 is high, but below one.
Market share in 2003 is positively associated with withholding the SoMC in 2005 and 2006.
5.6.3. Informativeness of Manufacturing Cost Reports
To illustrate a potential mechanism for how manufacturing cost disclosures might provide
capital market benefits, we examine the usefulness of disaggregating COGS for predicting future
earnings. Table 9 shows the SoMC components—raw materials, labor, and overhead—have
differential relations with future earnings. Aggregating these items into a single COGS figure
27
would preclude one from exploiting these differential relations when predicting future earnings.
F-tests of equality of these coefficient estimates are rejected in three out of six specifications.
[Table 9 about here.]
6. Conclusion
Accounting research has shown that firms consider competitive costs when making
voluntary disclosure choices, largely in the contexts of withholding product market and overall
financial performance information. A focus on cost disclosures is notably absent in the literature
despite the key role cost minimization plays in profit maximization, and the theorized importance
of cost information in competitive dynamics.
Examining Korea’s relaxation of mandatory disclosure of disaggregated manufacturing
cost information, we find that firms with distinctive cost structures and high market shares are
more likely to withhold this information. Gross profits increase and liquidity decreases for firms
that become non-disclosers relative to continuing disclosers. At the aggregate level, firms’
decisions to withhold manufacturing cost information are associated with profitability dispersion
within industries. Broadly speaking, these results suggest that withholding cost information from
competitors allows firms to create and maintain cost-leadership advantages in production and input
sourcing activities. We reinforce these empirical results and interpretations with survey evidence
indicating that managers view manufacturing cost disclosures from their own firm as providing
rivals with valuable competitive information.
We caveat our findings by noting that the disclosure variation we observe is driven by firm
choices. Though we take numerous steps to address alternative explanations, we cannot rule out
the possibility that non-disclosing and disclosing firms are unobservably different in a way
28
correlated with both our competitive position variables and our outcomes of interest. Thus, we see
promise for future studies that can leverage different research settings and empirical designs to
examine the determinants and economic consequences of cost disclosures. Future research could
also examine the specific production and input sourcing innovations firms make once cost
disclosures are withheld, though this would likely require additional data in order for researchers
to see through the veil raised by non-disclosure.
29
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A Variable Description
Firm-Level Variables
Description
NDMC
1 for years in which manufacturing cost information is not
disclosed, 0 otherwise
Cost Structure
Distinctiveness
The sum of squared differences (distance) between the
proportions of a firm’s manufacturing costs driven by raw
material, labor, and overhead costs, and the industry averages of
these proportions (computed from public firms only)
,
where RMC, LC, OC and MC are raw material, labor, overhead,
and total manufacturing costs, respectively
Market Share
Sales divided by industry total sales
Analyst Following
1 if analysts follow the firm, 0 otherwise
Chaebol
1 if a firm belongs to one of the 10 largest conglomerates by assets
in Korea in 2004, 0 otherwise
Customer Concentration
Sales to the three largest customers (by sales) divided by total
sales
Foreign Sales
Foreign sales divided by total sales
Gross Profit
Gross profit divided by sales
Illiquidity
Intangible Asset
Intangible assets divided by total assets
Investment
Total assets divided by lagged total assets minus 1
Large Shareholders’
Ownership
Proportion of shares held by large shareholders with more than
5% ownership, or significant influence over the firm’s decisions
Leverage
Book value of debt divided by book value of equity
Market to Book
Market capitalization divided by book value of common equity
Market Capitalization
Stock price multiplied by shares outstanding (billion won)
Negative Earnings
1 if lagged earnings are negative, and 0 otherwise
Net Income
Net income divided by sales
Operating Income
Operating income divided by sales
Product Concentration
Main product’s sales divided by total sales
Raw Material, Labor and
Other Costs, etc.
Raw material costs, labor costs, overhead costs, other COGS,
SG&A, and non-operating expenses divided by sales
Related Party Sales
Sales to related parties divided by total sales
Return Volatility
Sample standard deviation of returns
Sales Growth
Sales divided by lagged sales minus 1
Size
Log market capitalization or log total assets
Turnover
Average trading volume divided by shares outstanding
34
Industry-Level Variables
Description
Gross Profit Dispersion
The standard deviation of gross profit divided by sales
Herfindahl Index
The sum of the squares of each firm’s market share
Litigation Risk
1 if one of the five Korean securities class action lawsuits held
during 2005 to 2012 involved the industry, 0 otherwise
PPE Entry Barriers
Firms’ average PPE divided total assets
Proportion of Private Firms
The number of audited private firms divided by the number of
audited private firms and public firms
B Examples of Manufacturing Cost Disclosures
B.1 Korean Example: Hyundai Motor Company
Income statement excerpts:
(unit: million won)
2003
2002
2001
Sales
24,967,265
24,565,847
22,505,093
Domestic Sales
10,646,265
12,383,414
12,104,963
Foreign Sales
14,321,000
12,182,433
10,400,130
Cost of goods sold
18,248,594
18,626,256
17,079,037
Beginning inventory
330,195
276,717
596,217
Purchases for the period
391,976
736,077
2,103,283
Cost of products manufactured for the period
18,633,283
18,276,719
14,924,252
Sub-total
19,355,454
19,289,513
17,623,752
Transfer to other accounts
347,647
261,783
188,107
Duty refunds
104,140
71,279
79,891
Closing inventory
655,073
330,195
276,717
Gross profit
6,718,671
5,939,591
5,426,056
Schedule of manufacturing costs (from annual report):
(unit: million won)
2003
2002
2001
I. Raw material cost
14,830,070
14,075,671
11,797,809
1. Beginning raw material
165,925
194,945
156,806
2. Purchases of raw material
16,778,484
15,801,250
13,379,338
3. Other purchases
82,053
63,605
59,979
4. Closing raw material
268,187
165,925
197,363
5. Transfer to other accounts
1,928,205
1,818,203
1,600,951
II. Labor cost
1,706,184
1,720,974
1,366,183
1. Salary
701,307
647,239
551,395
2. Wage
213,687
190,760
170,470
3. Miscellaneous pay
0
0
0
4. Retirement allowance
200,532
299,647
113,543
5. Bonus
550,571
549,045
498,963
35
6. Allowance
40,087
34,280
31,811
III. Overhead cost
2,079,794
2,465,752
1,692,443
1. Employee benefits
221,031
200,275
172,842
2. Utilities
0
0
148,192
3. Taxes and dues
14,083
13,751
12,635
4. Insurance
3,396
3,050
2,767
5. Entertainment
840
874
894
6. Travel
9,124
9,720
7,252
7. Car
5,530
5,147
5,636
8. Commission
25,305
22,127
21,203
9. In-house outsourcing
288,409
212,885
157,001
10. Transportation
3,962
7,334
5,849
11. Communication
2,471
2,322
2,441
12. Office supply
1,473
1,568
1,595
13. Book
835
835
737
14. Consumables
24,908
24,765
25,059
15. Maintenance
101,057
116,348
70,011
16. Training
9,300
6,596
3,417
17. Test
2,932
2,544
2,237
18. Lease
0
0
185
19. Development
194,609
272,976
0
20. Loyalty
12,580
15,880
17,827
21. Depreciation
621,896
612,160
577,278
22. Litigation
88
36
29
23. Rent
870
846
695
24. Consumable metallic pattern
13,389
12,737
14,267
25. Manufacturing support
174,926
110,338
89,248
26. Amortization
177,414
653,786
353,147
27. Water, lighting, and heating
165,979
156,839
0
28. Other transportation
3,387
0
0
IV. Manufacturing cost for the period
18,616,048
18,262,398
14,856,434
V. Beginning work-in-progress
98,222
125,739
151,711
VI. Transfer from other accounts
151,401
13,195
41,847
VII. Sub-total
18,865,671
18,374,941
15,049,992
VIII. Closing work-in-progress
232,388
98,222
125,740
IX. Cost of products manufactured for the period
18,633,283
18,276,719
14,924,252
36
B.2 US Example: General Motors Company
Income statement excerpts:
Management’s discussion on the automotive cost of sales in 2013 (from the 10-K):
37
C Survey
C.1 Summary of Survey Responses
1. How would you characterize the size of your firm?
Large (>=10T KRW)
Medium (>=500B KRW,<10T KRW)
Small (<500B KRW)
N(responses)
13
2
17
What is your position in the firm?
Planning manager
Sales manager
Production manager
Purchasing manager
N(responses)
9
1
0
0
Human resource manager
Investor Relations / Accounting /
Financial manager
Other
N(responses)
1
20
1
2. Please indicate the area in which your firm operates.
Manufacturing
Finance
Service
Other
N(responses)
23
6
2
1
3. To the best of your knowledge, what is the market share of your firm in the main market in which it
operates?
Below 5%
5% – 10%
10% – 20%
20% – 30%
Above 30%
N(responses)
8
4
5
6
9
4. How would you describe the level of competition your firm faces?
Very intensive
Intensive
Mild
Very mild
12
15
4
1
5. How often do you conduct competitor analysis?
Once a month
Once a quarter
Twice a year
Once a year
Never
N(responses)
5
14
1
8
4
6. In your opinion, how important is competitor analysis for the following business activities? (5: Very
important-1: Unimportant)
Strategy
Marketing / Distribution /
Pricing
Production
Mean(responses)
4.28
4.19
3.45
Std(responses)
0.77
0.97
0.77
Procurement
Human resource
Investment / Financing
Mean(responses)
3.16
2.83
3.41
Std(responses)
0.90
0.75
1.04
38
7. What information sources do you use to analyse competitors’ sales (e.g. prices, volumes, and
distribution channels)? (3: Important-1: Unimportant)
Annual reports
Media / Government /
Analysts / Homepage
Commercial data providers or
consulting companies
Mean(responses)
2.66
2.44
2.13
Std(responses)
0.48
0.62
0.79
Market surveys
Industry association
Private channels
Other
Mean(responses)
1.47
2.16
2.41
1.45
Std(responses)
0.62
0.72
0.61
0.69
8. What information sources do you use to analyse competitors’ production (e.g. capacity, costs, raw
materials, and employees)? (3: Important-1: Unimportant)
Annual reports
Media / Government /
Analysts / Homepage
Commercial data providers or
consulting companies
Mean(responses)
2.56
2.22
1.97
Std(responses)
0.56
0.61
0.78
Market surveys
Industry association
Private channels
Other
Mean(responses)
1.53
2.00
2.31
1.55
Std(responses)
0.57
0.67
0.64
0.52
9. To your knowledge, how similar is your firm's manufacturing cost structure (or just cost structure) to
the manufacturing cost structure (or just cost structure) of other firms in the industry?
Very different
Different
Similar
Very similar
N(responses)
0
4
24
4
10. Do you agree with the following statement?
Knowledge of a firm's manufacturing cost structure (or just cost structure) would give its competitors
a significant advantage.
Strongly agree
Agree
No opinion
Disagree
Strongly disagree
%(responses)
15.6%
56.3%
12.5%
12.5%
3.1%
11. Do you agree with the following statement?
Knowledge of a firm's manufacturing cost structure (or just cost structure) would give its customers
and suppliers more bargaining power in dealings with the firm.
Strongly agree
Agree
No opinion
Disagree
Strongly disagree
%(responses)
12.5%
56.3%
18.8%
9.4%
3.1%
12. Until 2004, firms were required to disclose information about manufacturing costs in their annual
reports. If this information were still included in the annual report, would it be useful for competitor
analysis?
Percent responses
(1) Yes, it would.
87.5%
(2) No, it wouldn't because we are able to obtain the information from other sources.
9.4%
(3) No, it wouldn’t because the information is not useful.
3.1%
39
13. If you picked (1) or (2) in the previous question, please answer the following question. In your opinion,
how useful are manufacturing cost reports in the following activities? (5: Very important-1:
Unimportant)
Strategy
Marketing / Distribution /
Pricing
Production
Mean(responses)
4.03
4.03
4.06
Std(responses)
0.98
1.20
0.96
Procurement
Human resource
Investment / Financing
Mean(responses)
3.71
2.57
3.48
Std(responses)
1.24
1.19
1.06
14. Do you agree with the following statement?
Companies are unwilling to disclose information about manufacturing costs in their annual reports
because competitors are able to use it to their advantage.
Strongly agree
Agree
No opinion
Disagree
Strongly disagree
%(responses)
18.8%
53.1%
12.5%
12.5%
3.1%
40
C.2 Survey Questionnaire
Survey
You are invited to participate in the Competitor Analysis Survey. The goal of the survey is to understand
how companies conduct competitor analysis. We would like this survey to be answered by two groups in
your company:
1) Planning Department
2) Investor Relations Department (including Accounting Department)
If your team does not conduct competitor analysis or makes public disclosures, please forward this survey
to the appropriate team(s) in your company.
You will receive a summary of the survey results, which could potentially inform you about other
companies’ competitor analysis practices, their usage of different information sources for competitor
analysis, and their disclosure policies.
Please note the following.
1. The survey will take approximately 10 minutes to complete.
2. Survey responses will be kept confidential and on an encrypted computer. The data will be analysed at
an aggregate level to protect your privacy. If you choose to provide your contact details, please be assured
that your privacy will be maintained at all times.
If you have any questions about this survey, please contact:
General information
Please provide some general information about your company and yourself.
1. How would you characterize the size of your firm?
Large (>=10T KRW)
Medium (>=500B KRW,<10T KRW)
Small (<500B KRW)
What is your position in the firm?
Planning manager
Sales manager
Production manager
Purchasing manager
Human resource
manager
Investor Relations / Accounting / Financial
manager
Other, please specify
2. Please indicate the area in which your firm operates.
Manufacturing
Finance
Service
Other
Competitive environment
3. To the best of your knowledge, what is the market share of your firm in the main market in which it
operates?
Below 5%
5% – 10%
10% – 20%
20% – 30%
Above 30%
4. How would you describe the level of competition your firm faces?
Very mild
Mild
Intensive
Very intensive
5. How often do you conduct competitor analysis?
Never
Once a year
Twice a year
Once a quarter
More than once a
month
41
6. In your opinion, how important is competitor analysis for the following business activities? (Please
answer for each activity.)
Not applicable
Unimportant
Neither important
nor unimportant
Very
important
Strategy
Marketing
/Distribution/Pricing
Production
Procurement
Human resource
Investment/Financing
7. What information sources do you use to analyse competitors’ sales (e.g. prices, volumes, and
distribution channels)? Please indicate all numeric options that apply. 1= Unimportant; 2 = Neither
Important nor unimportant; 3 = Important)
Annual reports
Media / Government / Analysts /
Homepage
Commercial data providers or
consulting companies
Market surveys
Industry association
Private channels
Other
8. What information sources do you use to analyse competitors’ production (e.g. capacity, costs, raw
materials, and employees)? Please select all options that apply.
Annual reports
Media / Government / Analysts /
Homepage
Commercial data providers or
consulting companies
Market surveys
Industry association
Private channels
Other
Manufacturing costs and cost structure
9. To your knowledge, how similar is your firm's manufacturing cost structure (or just cost structure) to
the manufacturing cost structure (or just cost structure) of other firms in the industry?
Very different
Different
Similar
Very similar
10. Do you agree with the following statement? Knowledge of a firm's manufacturing cost structure (or
just cost structure) would give its competitors a significant advantage.
Strongly disagree
Disagree
No opinion
Agree
Strongly agree
11. Do you agree with the following statement?
Knowledge of a firm's manufacturing cost structure (or just cost structure) would give its customers
and suppliers more bargaining power in dealings with the firm.
Strongly disagree
Disagree
No opinion
Agree
Strongly agree
12. Until 2004, firms were required to disclose information about manufacturing costs in their annual
reports. If this information were still included in the annual report, would it be useful for competitor
analysis? Please pick the answer that best reflects your opinion.
1) Yes, it would.
2) No, it wouldn't because we are able to obtain the information from other sources.
3) No, it wouldn’t because the information is not useful.
42
If you picked (1) or (2) in the previous question, please answer the following question. In your opinion,
how useful are manufacturing cost reports in the following activities? (Please answer for each activity.)
Not applicable
Unimportant
Neither important
nor unimportant
Very
important
Strategy
Marketing
/Distribution/Pricing
Production
Procurement
Human resource
Investment/Financing
13. Do you agree with the following statement?
Companies are unwilling to disclose information about manufacturing costs in their annual reports
because competitors are able to use it to their advantage.
Strongly disagree
Disagree
No opinion
Agree
Strongly agree
14. Optional – please describe a specific example of competitor analysis for business activities.
15. Optional – please provide your contact details.
43
Figure 1 Trends of Gross Profit and Illiquidity
This figure plots the average gross profit and illiquidity, by year, for two matched sets of Korean
listed firms that disclosed the Schedule of Manufacturing Costs (SoMC) in 2003: those that
disclosed the SoMC in 2004, and those that withheld the SoMC in the same year. Disclosing firms
are one-to-one matched with non-disclosing firms with replacement and within industry. Appendix
A contains variable definitions.
44
Figure 2 Proportion of Non-disclosing Firms over Time
This figure plots the proportion of non-disclosing firms, by year, for Korean listed firms that
disclosed the Schedule of Manufacturing Costs in 2003.
45
Table 1 Timeline for New Manufacturing Cost Disclosure Regulation
This table chronicles the relaxation of the Schedule of Manufacturing Costs disclosure
requirements:
Date
Description
January 2004
The Korean Financial Supervisory Service (KFSS) launched a task force to
resolve any issues that could arise because of the planned 2005 expansion in scope
of securities class action lawsuits to cover accounting fraud in annual and quarterly
reports.
March 2004
The task force suggested possible supplementary changes in financial regulations.
One suggestion was to allow public firms to voluntarily disclose details of
manufacturing costs. The rationale was that proprietary costs of disclosure can be
large, and excessively detailed information about manufacturing costs can trigger
excessive securities class action lawsuits.
April 2004
The KFSS adopted the task force’s suggestions, and began to delineate a set of
items that would move from being mandatorily to voluntarily disclosed.
November 2004
The KFSS drafted new disclosure regulations that exempted the Schedule of
Manufacturing Costs and other sensitive information from mandatory disclosure.
December 2004
The Korean Financial Supervisory Commission (KFSC) adopted and announced
the public draft of new disclosure regulations.
46
Table 2 Data Description
Panel A – Sample Selection
This panel describes the sample selection.
Data Requirement
Number of Firms
Used in Table
Listed firms on the KSE and KOSDAQ in 2003 that…
1,563
…disclosed the Schedule of Manufacturing Costs in 2003,
1,330
…had the requisite financial and market data from 2003 to 2005,
1,203
…did not have extreme values because of denominators,
1,109
3, 4, 5, 10
…had the requisite financial and market data from 2001 to 2007,
900
9
…and were selected by propensity score matching
422
7, 8
Panel B – Descriptive Statistics
This panel reports descriptive statistics for Korean listed firms that disclosed the Schedule of
Manufacturing Costs in 2003 (the fourth row of Panel A above). Appendix A contains variable
definitions.
Variables
All (N=1,109)
NDMC=0 (N=729)
NDMC=1 (N=380)
Mean
Std Dev
Mean
Std Dev
Mean
Std Dev
Distinctive Cost Structure
0.0797
0.1351
0.0611
0.1045
0.1154
0.1744
Market Share
0.0169
0.0553
0.0126
0.0361
0.0252
0.0795
Herfindahl Index
0.0800
0.0722
0.0789
0.0675
0.0820
0.0805
Entry Barrier
0.3156
0.1148
0.3208
0.1123
0.3058
0.1190
Proportion of Private Firms
0.7924
0.0990
0.7983
0.0965
0.7810
0.1028
Customer Concentration
0.3034
0.3283
0.3137
0.3464
0.2837
0.2899
Related Party Sales
0.0680
0.1536
0.0692
0.1563
0.0658
0.1483
Foreign Sales
0.2806
0.3121
0.3007
0.3099
0.2419
0.3130
Gross Profit
0.1974
0.1466
0.1822
0.1280
0.2267
0.1734
Product Concentration
0.6300
0.2262
0.6254
0.2265
0.6389
0.2256
Size
24.07
1.53
24.02
1.40
24.18
1.77
Market Capitalization
258.36
2,232.60
125.85
540.96
512.58
3,729.80
Sales Growth
0.1720
0.3569
0.1762
0.3402
0.1641
0.3872
Leverage
0.4368
0.1957
0.4579
0.1882
0.3965
0.2035
Market to Book
0.8512
0.7998
0.7710
0.7345
1.0051
0.8931
Analyst Following
0.0622
0.2417
0.0494
0.2168
0.0868
0.2820
Litigation Risk
0.2489
0.4326
0.2949
0.4563
0.1605
0.3676
Large Shareholders’
Ownership
0.3378
0.1763
0.3370
0.1731
0.3394
0.1825
47
Table 2 cont.
Panel C - Correlation Matrix
This panel reports the correlation matrix for Korean listed firms that disclosed the Schedule of Manufacturing Costs in 2003 (the fourth
row of Panel A above) Appendix A contains variable definitions. p-values are in parentheses.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(1) NDMC
1.00
(2) Distinctive Cost
Structure
0.19
(0.00)
1.00
(3) Market Share
0.11
(0.00)
-0.01
(0.78)
1.00
(4) Herfindahl Index
0.02
(0.50)
0.02
(0.42)
0.35
(0.00)
1.00
(5) Entry Barrier
-0.06
(0.04)
-0.11
(0.00)
0.14
(0.00)
0.14
(0.00)
1.00
(6) Proportion of Private
Firms
-0.08
(0.01)
0.01
(0.72)
-0.06
(0.04)
-0.37
(0.00)
0.11
(0.00)
1.00
(7) Customer Concentration
-0.04
0.08
-0.12
0.13
-0.04
0.04
1.00
(0.15)
(0.01)
(0.00)
(0.00)
(0.13)
(0.16)
(8) Related Party Sales
-0.01
-0.04
-0.01
0.07
0.03
0.01
0.08
1.00
(0.73)
(0.14)
(0.82)
(0.03)
(0.38)
(0.68)
(0.00)
(9) Foreign Sales
-0.09
-0.10
0.05
0.29
0.09
-0.08
0.14
0.13
1.00
(0.00)
(0.00)
(0.13)
(0.00)
(0.00)
(0.01)
(0.00)
(0.00)
(10) Gross Profit
0.14
0.07
0.04
-0.14
-0.09
-0.21
-0.14
-0.12
-0.22
1.00
(0.00)
(0.03)
(0.14)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(11) Product Concentration
0.03
0.06
0.01
0.08
0.09
0.05
-0.01
-0.04
0.10
-0.02
1.00
(0.34)
(0.06)
(0.76)
(0.01)
(0.00)
(0.12)
(0.85)
(0.22)
(0.00)
(0.52)
(12) Size
0.05
-0.07
0.49
0.11
0.09
-0.02
-0.13
0.03
0.13
0.13
-0.06
1.00
(0.10)
(0.03)
(0.00)
(0.00)
(0.00)
(0.46)
(0.00)
(0.38)
(0.00)
(0.00)
(0.05)
(13) Sales Growth
-0.02
-0.01
0.00
0.08
-0.05
-0.01
0.06
0.01
0.03
0.00
0.01
0.09
1.00
(0.59)
(0.68)
(0.92)
(0.01)
(0.11)
(0.73)
(0.04)
(0.72)
(0.26)
(0.91)
(0.75)
(0.00)
(14) Leverage
-0.15
-0.07
0.07
0.05
0.01
0.07
0.00
-0.03
0.04
-0.24
-0.02
-0.10
0.06
1.00
(0.00)
(0.03)
(0.03)
(0.09)
(0.63)
(0.01)
(0.88)
(0.30)
(0.14)
(0.00)
(0.54)
(0.00)
(0.05)
(15) Market to Book
0.14
0.17
0.06
0.09
-0.09
-0.11
0.06
-0.05
0.02
0.12
-0.01
0.25
0.11
0.12
1.00
(0.00)
(0.00)
(0.05)
(0.00)
(0.00)
(0.00)
(0.05)
(0.08)
(0.56)
(0.00)
(0.65)
(0.00)
(0.00)
(0.00)
(16) Analyst Following
0.07
0.00
0.42
0.18
0.05
-0.06
-0.11
-0.01
0.10
0.11
-0.01
0.59
0.02
-0.03
0.18
1.00
(0.01)
(0.89)
(0.00)
(0.00)
(0.10)
(0.03)
(0.00)
(0.84)
(0.00)
(0.00)
(0.86)
(0.00)
(0.42)
(0.37)
(0.00)
(17) Litigation Risk
-0.15
-0.06
-0.11
0.34
-0.25
-0.10
0.18
0.06
0.21
-0.13
-0.05
0.02
0.15
0.05
0.07
0.01
1.00
(0.00)
(0.04)
(0.00)
(0.00)
(0.00)
(0.00)
(0.00)
(0.06)
(0.00)
(0.00)
(0.08)
(0.53)
(0.00)
(0.07)
(0.02)
(0.81)
(18) Large Shareholders'
Ownership
0.01
-0.05
-0.07
-0.02
0.09
0.01
-0.01
0.07
-0.06
0.03
0.01
-0.03
-0.03
-0.13
-0.13
-0.11
-0.08
1.00
(0.83)
(0.13)
(0.01)
(0.50)
(0.00)
(0.69)
(0.81)
(0.01)
(0.04)
(0.32)
(0.79)
(0.40)
(0.34)
(0.00)
(0.00)
(0.00)
(0.01)
48
Table 3 Effects of Competitive Position on Manufacturing Cost Disclosure
This table relates public firms’ competitive positions to their disclosure policies in 2004. NDMC
is 1 if a firm did not disclose its Schedule of Manufacturing Costs in 2004. The sample comprises
Korean listed firms that disclosed the Schedule of Manufacturing Costs in 2003. Appendix A
contains variable definitions.
(1)
(2)
(3)
(4)
VARIABLES
NDMC
NDMC
NDMC
NDMC
Distinctive Cost Structure
0.4653***
0.4641***
0.2918***
(0.1310)
(0.1291)
(0.0954)
Market Share
0.8437*
0.8377**
1.6712***
(0.4277)
(0.3957)
(0.4172)
Herfindahl Index
0.6004
0.4331
0.3215
(0.3672)
(0.4688)
(0.4427)
Entry Barrier
-0.3484*
-0.4073**
-0.3372*
(0.1894)
(0.1986)
(0.1877)
Proportion of Private Firms
-0.1199
-0.1043
-0.1584
(0.2974)
(0.3427)
(0.3131)
Customer Concentration
-0.0407
-0.0211
-0.0339
-0.0252
(0.0466)
(0.0474)
(0.0444)
(0.0401)
Related Party Sales
0.0625
0.0579
0.0655
0.0476
(0.1234)
(0.1194)
(0.1224)
(0.1201)
Foreign Sales
-0.0735
-0.0795
-0.0621
-0.0974**
(0.0450)
(0.0500)
(0.0470)
(0.0378)
Gross Profit
0.1737
0.1754
0.1612
0.1863
(0.1179)
(0.1150)
(0.1164)
(0.1455)
Product Concentration
0.0393
0.0540
0.0401
0.0532
(0.0658)
(0.0711)
(0.0656)
(0.0669)
Size
-0.0035
-0.0213*
-0.0161
-0.0211*
(0.0110)
(0.0122)
(0.0111)
(0.0112)
Sales Growth
-0.0036
-0.0021
0.0009
0.0362
(0.0337)
(0.0339)
(0.0332)
(0.0361)
Leverage
-0.3151***
-0.3730***
-0.3422***
-0.3100***
(0.0699)
(0.0700)
(0.0706)
(0.0768)
Market to Book
0.0708***
0.0918***
0.0765***
0.0642***
(0.0208)
(0.0236)
(0.0214)
(0.0186)
Analyst Following
0.0760
0.0647
0.0548
0.0419
(0.0566)
(0.0587)
(0.0571)
(0.0574)
Litigation Risk
-0.1889***
-0.1813***
-0.1636***
(0.0429)
(0.0526)
(0.0477)
Large Shareholders' Ownership
0.0119
0.0169
0.0288
0.1065
(0.0824)
(0.0874)
(0.0845)
(0.0835)
Observations
1,109
1,109
1,109
1,109
R-squared
0.1117
0.1014
0.1171
0.2126
Industry FE
NO
NO
NO
Yes
Robust standard errors clustered by industry in parentheses
*** p<0.01, ** p<0.05, * p<0.1
49
Table 4 Effects of Competitive Position on Manufacturing Cost Disclosure—Private Firms
This table relates private firms’ competitive positions to their disclosure policies in 2004. NDMC
is 1 if a firm did not disclose its Schedule of Manufacturing Costs in 2004. The sample comprises
Korean audited private firms that disclosed the Schedule of Manufacturing Costs in 2003.
Appendix A contains variable definitions.
(1)
(2)
VARIABLES
NDMC
NDMC
Distinctive Cost Structure
0.1293**
0.0658
(0.0509)
(0.0414)
Market Share
1.7471***
1.0343*
(0.3565)
(0.5565)
Herfindahl Index
-0.4328**
(0.1837)
Entry Barrier
0.1414
(0.0860)
Proportion of Private Firms
-0.1062
(0.1348)
Gross Profit
0.0397
-0.0461
(0.0602)
(0.0545)
Total Asset
0.0060
0.0062
(0.0112)
(0.0094)
Sales Growth
-0.0481***
-0.0398***
(0.0098)
(0.0077)
Leverage
-0.0473
-0.0466*
(0.0288)
(0.0278)
Observations
3,192
3,192
R-squared
0.0273
0.0720
Industry FE
No
Yes
Robust standard errors clustered by industry in parentheses
*** p<0.01, ** p<0.05, * p<0.1
50
Table 5 Covariate Balance Tests for Propensity Score Matching
This table reports covariate balance tests for the matched sample. Korean listed firms that disclosed
the Schedule of Manufacturing Costs in 2003 are partitioned into two sets: those that disclosed the
Schedule of Manufacturing Costs in 2004, and those that did not. Disclosing firms are one-to-one
matched with non-disclosing firms with replacement and within industry. Appendix A contains
variable definitions.
Variables
NDMC=1
NDMC=0
Difference
t-statistic
Distinctive Cost Structure
0.0589
0.0697
-0.0108
-1.19
Market Share
0.0114
0.0097
0.0017
0.57
Customer Concentration
0.2609
0.2568
0.0041
0.15
Related Party Sales
0.0664
0.0580
0.0083
0.65
Foreign Sales
0.2697
0.2807
-0.0110
-0.35
Gross Profit
0.2080
0.2058
0.0022
0.15
Product Concentration
0.6245
0.6369
-0.0124
-0.55
Size
24.1980
24.0330
0.1650
1.11
Sales Growth
0.1728
0.1651
0.0077
0.21
Leverage
0.4036
0.3974
0.0062
0.34
Market to Book
0.8297
0.7153
0.1144
1.65
Analyst Following
0.0758
0.0711
0.0047
0.19
Large Shareholders’ Ownership
0.3408
0.3448
-0.0041
-0.23
51
Table 6 Effects of Disclosure Decisions on Gross Profit and Illiquidity
This table relates the matched sample firms’ disclosure policies in 2004 to their subsequent gross
profit and illiquidity. Korean listed firms that disclosed the Schedule of Manufacturing Costs
(SoMC) in 2003 are partitioned into two sets: those that disclosed the SoMC in 2004, and those
that did not. Disclosing firms are one-to-one matched with non-disclosing firms with replacement
and within industry. The sample spans 2002 to 2007. Appendix A contains variable definitions.
(1)
(2)
(3)
(4)
VARIABLES
Gross Profit
Gross Profit
Illiquidity
Illiquidity
NDMC
0.0118**
0.0125**
0.1903
0.0847*
(0.0051)
(0.0050)
(0.1303)
(0.0466)
Size
0.0005
-1.0138***
(0.0050)
(0.0233)
Investment
0.0069
(0.0047)
Leverage
-0.0002
(0.0185)
Sales Growth
0.0048**
(0.0023)
Negative Earnings
-0.0097
(0.0066)
Return Volatility
0.6286***
(0.0696)
Turnover
-0.9177***
(0.0354)
Observations
2,532
2,532
10,128
10,128
R-squared
0.8266
0.8281
0.7570
0.8797
Firm FE
Yes
Yes
Yes
Yes
Year FE
Yes
Yes
No
No
Year-Quarter FE
No
No
Yes
Yes
Robust standard errors clustered by industry in parentheses
*** p<0.01, ** p<0.05, * p<0.1
52
Table 7 Manufacturing Cost Disclosure and Profitability Dispersion
This table relates the proportion of an industry’s firms withholding the Schedule of Manufacturing
Costs to dispersion in that industry’s firms’ subsequent gross profits. The sample comprises
Korean listed firms that disclosed the Schedule of Manufacturing Costs in 2003 and spans 2002 to
2007. Each industry is required to have at least 10 firms. Appendix A contains variable
definitions—the “Ind” prefix denotes an industry level average of the variable that follows.
(1)
(2)
VARIABLES
Gross Profit Dispersion
Gross Profit Dispersion
Ind NDMC
0.0416**
0.0371**
(0.0154)
(0.0176)
Herfindahl Index
0.0283
(0.2658)
Ind Intangible Asset
-0.2030
(0.2703)
Ind Size
-0.0031
(0.0111)
Ind Gross Profit
0.0504
(0.1391)
Ind Leverage
-0.0071
(0.0932)
Observations
132
132
R-squared
0.9130
0.9150
Industry FE
Yes
Yes
Year FE
Yes
Yes
Robust standard errors clustered by industry in parentheses
*** p<0.01, ** p<0.05, * p<0.1
53
Table 8 Robustness Tests for Determinants of Disclosure Decisions
This table relates public firms’ competitive positions to their disclosure policies in 2004 using different constructions of key variables
than those used in Table 3. The dependent variables in Columns 1 to 6 are 1 if firms stop disclosing the Schedule of Manufacturing
Costs (SoMC) in 2004. The dependent variables in Columns 7 and 8 are 1 if firms did not disclose the SoMC in 2005 and 2006,
respectively. The sample comprises Korean listed firms that disclosed the SoMC in 2003. Appendix A contains variable definitions.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
VARIABLES
Public
Cost
Customer
Bank
Chaebol
Industry
2005NDMC
2006NDMC
Distinctive Cost Structure
0.4214***
0.2351***
0.4619***
0.4364***
0.4493***
0.4681***
0.2699**
0.1621
(0.1257)
(0.0644)
(0.1307)
(0.1335)
(0.1267)
(0.1235)
(0.1283)
(0.1302)
Market Share
0.3630**
0.8471**
0.8445**
0.8137*
0.6655*
0.5062***
0.9047**
0.9513***
(0.1645)
(0.3853)
(0.3957)
(0.4058)
(0.3526)
(0.1743)
(0.3734)
(0.3497)
Observations
1,109
1,109
1,109
1,104
1,109
1,109
1,109
1,109
R-squared
0.1245
0.1171
0.1169
0.1499
0.1271
0.1194
0.1288
0.1345
Bank FE
NO
NO
NO
Yes
NO
NO
NO
NO
Robust standard errors clustered by industry in parentheses
*** p<0.01, ** p<0.05, * p<0.1
54
Table 9 Informativeness of Manufacturing Cost Reports about Subsequent Profitability
This table relates various components of firms’ manufacturing costs with various measures of their
subsequent year’s profitability. The sample comprises Korean listed firms that disclosed the
Schedule of Manufacturing Costs in 2003 and spans 1995 to 2003. The last three rows report p-
values from F-tests of the equality between the Raw Material, Labor, and Overhead’s coefficient
estimates. Appendix A contains variable definitions.
(1)
(2)
(3)
(4)
(5)
(6)
VARIABLES
Gross Profit
Gross Profit
Operating
Income
Operating
Income
Net Income
Net Income
Raw Material
-0.7935***
-0.7164***
-0.5637***
-0.5451***
-0.6097***
-0.6245***
(0.0566)
(0.0483)
(0.0380)
(0.0348)
(0.0453)
(0.0445)
Labor
-0.8248***
-0.6895***
-0.6655***
-0.5311***
-0.6325***
-0.5402***
(0.0730)
(0.0588)
(0.0660)
(0.0706)
(0.0793)
(0.0883)
Overhead
-0.7900***
-0.6787***
-0.5691***
-0.5148***
-0.6450***
-0.6302***
(0.0633)
(0.0547)
(0.0411)
(0.0389)
(0.0520)
(0.0551)
Other COGS
-0.7943***
-0.7043***
-0.5940***
-0.5262***
-0.6456***
-0.6116***
(0.0578)
(0.0467)
(0.0394)
(0.0321)
(0.0521)
(0.0486)
SG&A
-0.5741***
-0.5407***
-0.7817***
-0.7697***
(0.0353)
(0.0327)
(0.0593)
(0.0511)
Non-operating
Expense
-0.1551***
-0.1241***
(0.0392)
(0.0382)
Observations
6,038
6,038
6,038
6,038
6,038
6,038
R-squared
0.6995
0.7357
0.3511
0.3986
0.2041
0.2467
Industry FE
No
Yes
No
Yes
No
Yes
Year FE
No
Yes
No
Yes
No
Yes
RMC=LC
0.6136
0.4896
0.0583*
0.8043
0.7234
0.3159
RMC=OC
0.8358
0.0366**
0.6623
0.2281
0.0786*
0.8914
LC=OC
0.6152
0.8193
0.0763*
0.8071
0.8494
0.3328
Robust standard errors clustered by industry in parentheses
*** p<0.01, ** p<0.05, * p<0.1
