A Measure of Competition Based on 10-K Filings

In this paper we develop a measure of competition based on management’s disclosures in their 10-K filing and find that firms’ rates of diminishing marginal returns on new and existing investment vary significantly with our measure. We show that these firm-level disclosures are related to existing industry-level measures of disclosure (e.g. Herfindahl index), but capture something distinctly new. In particular, we show that the measure has both across-industry variation and within-industry variation, and each is related to the firm’s future rates of diminishing marginal returns. As such, our measure is a useful complement to existing measures of competition. We present a battery of specification tests designed to explore the boundaries of our measure and how it varies with the definition of industry and the presence of other measures of competition.

[1]  Gerard Hoberg,et al.  Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis , 2008 .

[2]  P. Healy,et al.  Business Analysis and Valuation: Using Financial Statements, Text and Cases , 2013 .

[3]  Stephen V. Brown,et al.  Large-Sample Evidence on Firms’ Year-Over-Year MD&A Modifications , 2011 .

[4]  Alfred Wagenhofer,et al.  Voluntary disclosure with a strategic opponent , 1990 .

[5]  Asher Curtis,et al.  The Comparability of Accounting Rates of Return Under Historical Cost Accounting † , 2011 .

[6]  C. Karuna,et al.  Industry product market competition and managerial incentives , 2007 .

[7]  Kevin K. Li,et al.  How well do investors understand loss persistence? , 2011 .

[8]  Margaret A. Peteraf.  The cornerstones of competitive advantage: A resource‐based view , 1993 .

[9]  S. Penman.  Financial Statement Analysis and Security Valuation , 2001 .

[10]  Chad Syverson,et al.  Product Substitutability and Productivity Dispersion , 2003, Review of Economics and Statistics.

[11]  Mark T. Soliman,et al.  The Use of Dupont Analysis by Market Participants , 2007 .

[12]  Tim Loughran,et al.  When is a Liability not a Liability? Textual Analysis, Dictionaries, and 10-Ks , 2010 .

[13]  George J. Stigler,et al.  Capital and Rates of Return in Manufacturing Industries. , 1964 .

[14]  Teri Lombardi Yohn,et al.  Do Industry-Level Analyses Improve Forecasts of Financial Performance? , 2009 .

[15]  Daniel A. Bens,et al.  Discretionary Disclosure in Financial Reporting: An Examination Comparing Internal Firm Data to Externally Reported Segment Data , 2009 .

[16]  Gerard Hoberg,et al.  Text-Based Network Industries and Endogenous Product Differentiation , 2010, Journal of Political Economy.

[17]  The Role of Analysts’ Forecasts in Accounting-Based Valuation: A Critical Evaluation , 2005 .

[18]  Baruch Lev,et al.  Some economic determinants of time-series properties of earnings , 1983 .

[19]  Chad Syverson,et al.  Market Structure and Productivity: A Concrete Example , 2004, Journal of Political Economy.

[20]  George J. Stigler,et al.  The Organization of Industry , 1969 .

[21]  M. Porter.  How Competitive Forces Shape Strategy , 1989 .

[22]  S. Ross.  Do Stock Market Investors Understand the Risk Sentiment of Corporate Annual Reports , 2006 .

[23]  Amir Sufi,et al.  Explaining Corporate Capital Structure: Product Markets, Leases, and Asset Similarity , 2010 .

[24]  Suraj Srinivasan,et al.  Market Competition, Government Efficiency, and Profitability Around the World , 2011 .

[25]  Friedrich A. von Hayek,et al.  Individualism and Economic Order , 1949 .

[26]  C. Fee,et al.  Proprietary Costs and the Disclosure of Information About Customers , 2010 .

[27]  Gerard Hoberg,et al.  Product Market Threats, Payouts, and Financial Flexibility , 2012 .

[28]  Lewis Carroll,et al.  The Annotated Alice: Alice's Adventures in Wonderland and Through the Looking Glass , 1960 .

[29]  Richard G. Sloan,et al.  Accrual Reliability, Earnings Persistence and Stock Prices , 2005 .

[30]  C. Leuz.  Proprietary Versus Non-Proprietary Disclosures: Evidence from Germany , 2003 .

[31]  Steven R. Grenadier.  Option Exercise Games: An Application to the Equilibrium Investment Strategies of Firms , 2002 .

[32]  Stephen H. Penman,et al.  Ratio Analysis and Equity Valuation: From Research to Practice , 2001 .

[33]  Peter D. Turney.  Thumbs Up or Thumbs Down? Semantic Orientation Applied to Unsupervised Classification of Reviews , 2002, ACL.

[34]  M. Harris,et al.  The Association between Competition and Managers' Business Segment Reporting Decisions , 1998 .

[35]  Derek Oler,et al.  What's My Line? A Comparison of Industry Classification Schemes for Capital Market Research , 2003 .

[36]  P. M. Fairfield,et al.  Accrued Earnings and Growth: Implications for Future Profitability and Market Mispricing , 2003 .

[37]  Xi Li,et al.  The impacts of product market competition on the quantity and quality of voluntary disclosures ∗ , 2010 .

[38]  E. Fama,et al.  Forecasting Profitability and Earnings , 1999 .

[39]  Richard G. Sloan,et al.  Equity Valuation and Analysis With Eval , 2003 .

[40]  Nerissa C. Brown,et al.  Intangible investment and the importance of firm-specific factors in the determination of earnings , 2011 .

[41]  Rebecca N. Hann,et al.  Segment Profitability and the Proprietary and Agency Costs of Disclosure , 2007 .

[42]  E. Fama,et al.  Industry costs of equity , 1997 .

[43]  Ashiq Ali,et al.  The Limitations of Industry Concentration Measures Constructed with Compustat Data: Implications for Finance Research , 2008 .

[44]  Evrim Akdoğu,et al.  Investment and Competition , 2006 .

[45]  L. Brooks,et al.  FURTHER EVIDENCE OF THE TIME SERIES PROPERTIES OF ACCOUNTING INCOME , 1976 .

[46]  W. P. Barnett,et al.  Why are Some Organizations More Competitive than Others? Evidence from a Changing Global Market , 2004 .

[47]  Rachel M. Hayes,et al.  Segment Reporting to the Capital Market in the Presence of a Competitor , 1996 .

[48]  Teri Lombardi Yohn,et al.  Using Asset Turnover and Profit Margin to Forecast Changes in Profitability , 2001 .

[49]  J. Barney.  Types of Competition and the Theory of Strategy: Toward an Integrative Framework , 1986 .

[50]  Which Competitive Efforts Lead to Future Abnormal Economic Rents? Using Accounting Ratios to Assess Competitive Advantage , 2012 .

[51]  Elisabeth Dedman,et al.  Perceived competition, profitability and the withholding of information about sales and the cost of sales , 2009 .