Biased Voluntary Disclosure, Earnings Target, And Product Market Competition

Accounting survey and anecdotal evidence suggest that firms could voluntarily disclose their private information to improve the credibility of earnings targets and to signal meeting /beating of earnings targets. In addition, voluntarily issuing private information can be characterized as a way to influence product market competition. The motivation of this study is to investigate the effect of earnings target on a firm’s voluntary disclosure decision and its impact on oligopoly competition. We consider a two-stage oligopoly model with one-sided incomplete information in which a firm has private information on its type and its marginal cost. We show that a firm can choose a downward biased report about its cost information in Cournot competition. This could increase this firm’s outputs and profits and meet its earnings target as well. In this sense, the effect of earnings target on voluntary disclosure can improve the firm’s competitiveness. In Bertrand competition, a firm can choose an upward biased report about its cost information, and this allows both firms to boost their price level in oligopoly competition and thus both firms can obtain higher profits. In this case, the effect of earnings target on voluntary disclosure could facilitate implicit collusion in price-setting under Bertrand competition. This paper contributes to the research on voluntary disclosure theory in terms of how earnings targets affect product market competition through distorting a firm’s voluntary disclosure decision.