Corporate Disclosure as a Tacit Coordination Mechanism

In an earnings conference call with investors in 2008, Edward J Shoen, chief executive officer and chairman of U-Haul International, Inc., lamented that the Avis Budget Group, Inc., its main competition in one-way, do-it-yourself moving rental trucks, had failed to match U-Haul’s recent decision to raise prices. Calling the lack of response ‘unfortunate for the entire industry’, Shoen said, ‘U-Haul will wait a while longer for Budget to respond appropriately. Otherwise, it will drop its rates.’ Eighteen months later, U-Haul settled US Federal Trade Commission charges of attempting to collude on a ‘price-fixing plan’ that could have imposed higher prices on consumers.

It is typically argued that publicly listed firms should increase transparency by disclosing more information in their financial statements. Such disclosure reduces the cost of capital, levels the information playing field for different investors, and allows investors to monitor managers more efficiency through reduced information asymmetry. However, as the U-Haul case suggests, transparency has the potential to impose costs to consumers in product markets.

In a recent paper, we empirically examine a potential cost of transparency in financial markets by looking at whether firms use disclosure targeted at investors as a means to coordinate actions in product markets. Our research looks at 1,605 US publicly listed companies across different industries and spans a period from 1994 to 2012. We argue that when there is stronger antitrust enforcement against illegal overt price-fixing activities, firms switch to a grey zone of public communication.

Our work indeed shows that when antitrust enforcement increases firms start sharing more information such as product price data in their material contracts that they submit as the SEC filings. They also have more forward-looking discussion of product-market strategies in the content of conference calls with equity analysts, similarly to the U-Haul example. This is the information that rivals might use to form and coordinate their own product strategies.

Our findings lend support to calls for more regulatory cooperation between antitrust and securities legislation. They also suggest that firms have to be careful in how they choose their public communication to investors, so that their actions are not perceived as infringing antitrust laws.

ZALDOKAS , Alminas

Associate Professor