Disclosing to Conceal: Impeding Competitor Learning from the Stock Market

Abstract

A firm’s stock price may reveal information that the firm itself might not want to share. In particular, stock price may reveal information about future demand, which when learned by a rival undercuts the firm’s competitive position. This paper establishes that when a firm discloses cost information it can confound decision-relevant demand information embedded in the stock price that a rival can otherwise extract. With stock price valuing firm profit (not cost and revenue separately), a disconnect is introduced between the firm’s actions and its intent – it discloses more on one dimension when its intent is to conceal on another. Consequently, a firm’s disclosure must be made strategically accounting for both direct communication as well as indirect information transmission via its stock price. From the firm’s perspective, the “competitive upside” from disclosing to keep the rival in the dark about market demand is evaluated against the “valuation downside” from disclosing more unfavorable cost information.