CLS Blue Sky Blog

Do Companies Lobby Against Mandatory Disclosure to Protect Proprietary Information?

Critics of mandatory public disclosure often argue that it may put disclosing firms at a competitive disadvantage by requiring them to  reveal potentially proprietary information to rivals. For instance, when the Financial Accounting Standards Board (FASB) proposed to mandate more disaggregated disclosure of segment information, many firms lobbied vigorously against the new rule (SFAS No. 131), arguing that it would be “competitively harmful to the reporting enterprise” (FASB 1997).

However, there is little evidence that reporting mandates actually result in competitive harm. More importantly, it is unclear whether the expressed concerns about proprietary costs reflect the true lobbying motive. Research has shown that companies sometimes use professed concerns to hide their true reason for lobbying: to protect the interests of managers. For instance, Dechow et al. (1996) find that corporate lobbying against mandatory expensing of stock options is motivated by top executives’ desire to avoid public scrutiny of their high compensation rather than the adverse impact on firm performance, as lobbyists argue. It is possible, then, that managers who wish to hide poor-performing segments choose to lobby against the new segment reporting rule, nevertheless citing competitive harm to justify their opposition.

In a new study, I use a sample of firms that lobbied against SFAS No. 131 to test whether they did so because of concerns about proprietary costs or to serve managers’ self-interest. Specifically, I examine (1) characteristics of lobbying firms that cited competitive harm as the basis for opposition; (2) whether firms that lobbied against the new segment reporting rules on the grounds of proprietary costs experienced a decrease in operating performance after the adoption of SFAS No. 131; (3) whether concerns about proprietary costs also explain industry associations’ lobbying behavior; and (4) the nature of the competition underlying firms’ proprietary-cost motive to lobby.

Characteristics of Firms that Used Competitive Harm for Opposition 

I begin by analyzing characteristics of lobbying firms that cited competitive harm as a reason to oppose SFAS No. 131. If the expressed concerns about proprietary costs reflect the true motive, I expect these lobbying firms to have high growth opportunities and operate in competitive environments. If the true motive is to hide segments with poor performance, I expect these firms to have lower profitability and suboptimal investments (e.g., subsidizing poor-performing divisions and financing pet projects). Consistent with the proprietary-cost lobbying motive, I find that firms that cited competitive harm are profitable growth firms that face more intense competition, are more likely to report positive R&D expenses, and are less likely to have inefficient internal capital allocation. In addition, I find a negative market reaction around the issuance of the proposal, consistent with the perceived negative impact of the proposed regulation on these lobbying firms. Overall, the analyses of firm characteristics and market reactions provide initial evidence that the stated concerns about proprietary costs seem to be the real lobbying motive.

Impact of the Adoption of SFAS 131 on Lobbying Firms’ Operating Performance

Next, I examine whether the mandated increase in segment disaggregation after the adoption of SFAS 131 affects the disclosing firm’s operating performance. Because the final standard was scaled back from the initial proposal, some lobbying firms were actually able to report the same segments as before (i.e., the no-change firms), while the rest were forced to change their segment reporting following the implementation of SFAS 131 (i.e., the change firms), although they all lobbied against the proposal on the grounds of proprietary costs. I employ a difference-in-differences research design, using the change firms as the treatment group and the no-change firms as control. I find that firms that were forced to change their segment reporting experienced a decline in operating performance after SFAS 131, relative to no-change firms that were not affected by the new standard. Additional dynamic analysis shows that the deterioration in operating performance for change firms occurred after but not before the adoption of SFAS 131.

The Incentives Behind Industry Associations’ Lobbying: Analyses of Nonlobbying Firms

Next, I examine whether concerns about proprietary costs also explain industry associations’ lobbying behavior. I collect opposing letters submitted by lobbying associations and divide the sample firms into lobbying and nonlobbying industries based on association lobbying. Within each industry, I count how many firms were affected by SFAS 131 (i.e., the change firms) and how many were not (i.e., the no-change firms). I find that an industry association is more likely to lobby if the proposed regulation is expected to affect more member firms.

Then, I examine the member firms’ operating performance for lobbying and nonlobbying industries separately. I find that, in nonlobbying industries, the operating performance of change firms does not differ from that of no-change firms in either the pre– or post–SFAS 131 periods. In lobbying industries, however, I find a significant negative impact on the post–SFAS 131 operating performance for change firms, although the treatment and control firms do not differ from each other in years leading up to the adoption of SFAS 131. In these tests, to ensure that the results are not driven by lobbying firms, I restrict the sample to nonlobbying firms. The results thus indicate that the adverse impact documented for a small group of lobbying firms can be applied generally to the vast majority of nonlobbying firms whose industry associations voiced similar concerns of competitive harm, suggesting that associations are motivated by member concerns to lobby in accounting standard setting.

A Closer Look at Operating Performance Drivers

Finally, I explore the underlying mechanism by examining factors that affect operating performance. I analyze sales growth to test whether change firms lose market share to their competitors. I also separate overall firm performance into two components: profit margin, which captures a firm’s pricing power in product markets, and asset turnover, which measures a firm’s asset utilization and efficiency. I find that change firms experience lower sales growth and smaller profit margins (but no change in asset utilization efficiency) after the adoption of SFAS 131. Moreover, I find that firms with abnormal profit margins in the pre–SFAS 131 period seem able to tolerate a reduction in profit margin to protect their market share, whereas those without abnormal profit margins experience a smaller drop in profit margin but take a bigger hit on market share. These findings collectively provide additional insights into the nature of the competition underlying firms’ proprietary-cost motive to lobby.


Using the change in segment reporting rules of SFAS 131 and a sample of lobbying firms, I examine the real effects of disclosure regulation and provide evidence that a mandated increase in segment disaggregation could cause competitive harm. The adverse impact does not appear to be limited to a small group of lobbying firms, as many firms may lobby through their industry associations. These findings shed light on lobbying motives and suggest that concerns about the competitive harm of reporting mandates were warranted. I believe understanding what motivates firms to lobby is essential for efficient regulation design, and the evidence I present in this study has important implications for FASB’s current projects, including the Financial Performance Reporting—Disaggregation of Performance Information project (FASB 2020) and the Segment Reporting project (FASB 2021).


Financial Accounting Standards Board (FASB). 1997. Disclosures about Segments of an Enterprise and Related Information. Statement of Financial Accounting Standards No. 131. FASB, Norwalk, CT.

Dechow, P., Hutton, A., and Sloan, R. 1996. Economic Consequences of Accounting for Stock-based Compensation. J. Account. Res. 34:1–20.

Financial Accounting Standards Board (FASB). 2020. Financial Performance Reporting—Disaggregation of Performance Information. FASB, Norwalk, CT.

Financial Accounting Standards Board (FASB). 2021. Segment Reporting. FASB, Norwalk, CT.

This post comes to us from Professor Ying Zhou at the University of Connecticut. It is based on her recent paper, “Proprietary Costs and Corporate Lobbying against Changes in Mandatory Disclosure,” available here.

Exit mobile version