It is well known that financial market regulation has grown stronger over the years. For example, legislation has mandated that publicly-listed firms increase their transparency by disclosing more information in their financial statements. This level of disclosure has had the effect of reducing the cost of capital, levelling the information playing field for investors, and allowing investors to better monitor managers via reduced information asymmetry. Nevertheless, increasing transparency results in a cost to product-market consumers, and has led to regulators voicing concerns over unintended consequences, since “doing so provides firms with means to coordinate product-market actions”.

In this context, a recent paper by Thomas Bourveau, Guoman She, and Alminas Zaldokas aims to empirically study how collusion in product markets affects firms’ financial disclosure strategies. Specifically, they look to investigate this unexplored cost of transparency in financial markets by examining whether firms use disclosure targeted at investors to coordinate actions in product markets. Of course, recognizing the difference between disclosure designed to facilitate collusion and disclosure targeted at investors is difficult, due to choices likely being endogenously determined, while directly observing colluding firms might well be impossible. This is why the authors’ strategy relies on exogenously varying incentives to tacitly collude. They investigate a setting in which anti-trust authorities gain more power to detect price-fixing activities, arguing that this leads to higher explicit collusion costs and therefore, for some firms, tacit collusion becomes a more profitable strategy than explicit collusion. Simply put, higher private communication costs make public communication more attractive. The authors explain that this approach allows them to study whether “higher incentives to tacitly coordinate actions in product markets push firms to start unilaterally providing more information on product market strategies in their financial disclosure documents.

Based on a sample of U.S. publicly-listed companies from 1994 to 2012, the study uses a measure designed to capture exogenous increases in explicit collusion costs at the industry level. Bourveau, She, and Zaldokas point out that, in light of the rise in prominence of international cartels and the focus of U.S. anti-trust authorities on investigations involving non-U.S. conspirators, their research relies on the passing of anti-trust laws in countries with which the firms’ industry trades. More precisely, they study leniency laws (which allow cartel members who provide key evidence to prosecutors to obtain amnesty, thereby reducing legal exposure) passed or strengthened globally since 1993.

To measure the incentives to collude, the study takes a weighted average of the passing of such laws, with the weights determined by the share of U.S. industry trade links with the respective country. This allows for the capturing of changes in behaviour of firms belonging to industries that trade relatively more with countries adopting leniency laws, in comparison to firms that belong to industries that trade less with those countries.

Starting by documenting that foreign leniency laws predict the dissolution of known cartels involving U.S. firms, the paper goes on to record a decline in the profit margins, equity returns, and product prices of the affected U.S. firms. The authors then look into how firms communicate their product-market strategies in their financial disclosure documents to sustain a tacit coordination equilibrium. To do so, they examine two distinct communication channels: firms’ material contracts with customers, where firms face strong disclosure requirements; and transcripts of firms’ earnings conferences calls with equity analysts, during which calls, anti-trust agencies claimed that firms were altering competition in product markets.

The research finds that after foreign leniency laws are passed, and the costs of explicit collusion rise, firms are less likely to redact information from their publicly disclosed customer contracts. Focusing on the industries most exposed to each foreign law, the authors discover that each adoption of a leniency law explains 19% (on average) of within-firm variance of redaction. Regarding earnings conference calls, the authors show that managers reveal more about their product-market strategies during calls with equity analysts after foreign leniency laws have been adopted. This change in disclosure is found to be more pronounced in industries that are more likely to engage in collusive behaviour, industries that have a better ability to sustain coordination using unilateral disclosure, and larger firms that are more likely to be unilateral disclosure leaders. In terms of whether disclosure changes have economic consequences, the study reveals that firms which adapt their disclosure strategies by increasing product-market–related communication experience “only a very modest drop in profitability following the passing of foreign leniency laws”. At the same time, the profitability of the firms which do not change their disclosure strategies suffers substantially.

In short, despite the benefits, greater transparency in financial markets could produce anti-competitive effects by enabling collusion in product markets. Furthermore, after higher cartel enforcement, U.S. firms have been found to share more detailed information in their financial disclosure documents about their customers, contracts, and products. This information might then benefit peers by helping to tacitly coordinate actions in product markets. The results of this study have important policy implications, as they suggest that financial disclosure rules should account for potential externalities to anti-trust enforcement.