KNOWLEDGE LINK
Scholars on financial reporting say disclosure may be used to
influence herd behavior, alter competitive landscape

When Hollywood celebrities distribute photographs of their newborn to the media, the intended effect may have been to divert hordes of paparazzi jockeying to snap images of private moments to sell to the tabloids.

A Fisher professor who studies the accounting practices of companies said some firms may employ this Hollywood tactic when disclosing sensitive information to third-parties such as analysts and the media.

Anil Arya, the John J. Gerlach Chair of Accounting at Fisher, along with Fisher alumnus Brian Mittendorf, now on the faculty at Yale’s School of Management, concluded in their study that public companies’ controlled release of “proprietary information” to key financial and securities analysts may be a similar effort to influence perceptions about their firms to competitors by creating herd behavior among third-parties.


“While publicly revealing pertinent information may give a competitor an advantage, it can also induce herding on the part of the third parties. Such herding may actually help the firm keep its competitive edge by suppressing a greater amount of sensitive information than revealed via disclosure..”

Anil Arya

“The firm directs the herd in a more subtle fashion: by disclosing some pertinent information publicly, the firm convinces each information provider that any further digging is not worthwhile,” the authors reported in their article, “Using Disclosure to Influence Herd Behavior and Alter Competition,” published in the Journal of Accounting and Economics last fall.

“The goal of giving information may really be to reduce information,” Arya said. “The firm may not want analysts looking too closely at them. Their rationale is: ‘If I give the analysts some information, they will stop chasing me.’ The firm can put the analysts in the direction of their choosing.”

According to Arya, that outcome—an “information cascade”—is a concept that has been studied by numerous scholars. Arya’s and Mittendorf’s study is an attempt to show how the presence of third-party information providers (such as the analysts) can have a subtle influence on whether or not firms choose to disclose. It also sheds a different light on some observed regularities. For example, it is the case that firms with large analyst following tend to disclose more. Such a connection may arise because a firm seeks to appease demanding analysts by providing more information; or, it could also arise because, with more analysts, there is more reason for the firm to guide the herd in the direction of its choosing.

The paper considers: “the question of disclosure when both strategic (competitive) effects and third-party information providers (analysts and media) are at play.” Companies may engage in this tactic because of monitoring by multiple marketplace participants, Arya said. “While publicly revealing pertinent information may give a competitor an advantage, it can also induce herding on the part of the third parties. Such herding may actually help the firm keep its competitive edge by suppressing a greater amount of sensitive information than revealed via disclosure.”

In general, people view sharing information as a good thing, Arya said. Yet in its conclusion the authors also caution that: “disclosure and third-party herding highlights the difficulties in determining the firm’s intentions. Though greater transparency may seem like a vehicle for enhancing information in the public view, it may also be an indicator of opposite intentions….thereby having a chilling effect on the diversity of views to which the public can access.”

The article is available for download on the Fisher page at SSRN.com: http://papers.ssrn com/sol3/ JELJOUR_Results.cfm?form_name=journalbrowse&journal_id=917143