From an investor’s point of view, more information is nearly always a good thing, which is why regulators typically require public companies to make a wide range of disclosures. Research from Chicago Booth highlights how disclosing too much information can be harmful to profits, however, as it can damage the innovative capabilities of the firm.

The researchers examined what happens when South Korean regulators relaxed the reporting requirements relating to the cost of sales of companies. The results suggest that by virtue of not having to provide so much detail to regulators, it gave companies an additional incentive to innovate as their rivals wouldn’t be able to simply copy any cost-side innovations via their financial statements. This resulted in both productivity and profits rising.

“Our results should be of interest to these standard setters,” the researchers explain. “Although their objective of ‘decision usefulness’ is couched in terms of investors, we illustrate that firms themselves use disaggregated CoS information to keep up with competitors.”

Regulatory requirements

In South Korea, the Financial Services Commission required public companies to report details about things like labor, raw material, and overhead costs up until 2003. It then made these disclosures optional in 2004, with the regulator arguing that mandatory reporting would often contain proprietary information that would impose a considerable legal burden on the reporting firms.

The data shows that the companies that voluntarily chose not to continue reporting this information saw bigger gains in their profitability than those that continued doing so. Indeed, the results show that gross profits were around 2% higher for the firms that stopped disclosing the information.

The researchers believe that the act of withholding the information was largely motivated by a desire to innovate, and that the companies that withheld the information saw productivity gains in the region of 7% compared to their peers.

“These results provide causal evidence that disaggregated CoS is likely to reduce investments in cost innovations specifically,” the researchers explain. “Nondisclosure of cost information might prevent foreign competitors from learning about domestic firms’ cost advantages, making the relation between disclosure regimes and economic growth more complex in open than in closed economies.”