Rival Firms' Voluntary Disclosure Response to a Competitor's Financial Distress Event
Abstract
In this study, I investigate whether rival firms increase their voluntary disclosures to investors and customers in response to a competitor’s financial distress event, specifically a covenant violation or bankruptcy. I expect firms to communicate different information in response to each type of financial distress event because of differences in the audience for each event. The audience for covenant violations is likely to consist of capital providers, a narrow and financially savvy group, whereas bankruptcies are likely relevant to a broad range of stakeholders including customers. Rivals may respond to the information needs of the different audiences by communicating earnings information at the earlier stage of financial distress (covenant violation), and product information at the later stage (bankruptcy). I capture voluntary disclosure using management earnings forecasts and product-related press releases and find that rivals increase their issuance of management earnings forecasts following a competitor’s covenant violation, consistent with rivals increasing their disclosures to alleviate investors’ concerns about their financial health. Rivals also increase their issuance of product-related press releases following a competitor’s bankruptcy. Disclosing rivals experience an increase in sales growth, market share, and new customers consistent with disclosure having product market benefits. Overall, the results suggest rival firms use voluntary disclosures to communicate with investors and customers following a competitor’s financial distress event, alleviating information asymmetry in the capital markets and also taking advantage of the competitive opportunity to influence the product markets. The results highlight the importance of the audience and disclosure type in managers’ disclosure decisions.
Citation
Tori, Elizabeth June (2021). Rival Firms' Voluntary Disclosure Response to a Competitor's Financial Distress Event. Doctoral dissertation, Texas A&M University. Available electronically from https : / /hdl .handle .net /1969 .1 /195152.