New Entry Threats and Corporate Disclosure: Evidence from the U.S. High-Tech Sector

Abstract

We evaluate two competing views – the proprietary costs theory and the entry deterrence theory – in explaining the relationship between entry threats and firms’ disclosure. We examine if entry threats from technology startups influence firms’ information disclosure in the high-tech sector, where significant turbulence emerges from new ventures. Leveraging a new measure of new entry threats (NET) based on text mining of publicly available information, we show that a higher level of NET faced by incumbent firms are associated with a decrease in the transparency of its information disclosure, measured by two indicators: a disclosure index derived from analyst forecasts, and confidential treatment orders filed by firms. Our results support the proprietary cost theory of disclosure. Interestingly, we find this effect to be more pronounced in sectors where proprietary information is vulnerable to misappropriation, and in industries associated with higher worker mobility. We discuss implications for research and insights for practitioners.