Disclosure to Regulate Learning in Product Markets from the Stock Market

By Anil Arya, Ram Ramanan
The Accounting Review | May 2022

DOI

doi.org/10.2308/TAR-2020-0033

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Citation

Arya, Anil., Ramanan, Ram. Disclosure to Regulate Learning in Product Markets from the Stock Market The Accounting Review doi.org/10.2308/TAR-2020-0033.

The Accounting Review, 2022

Abstract

A firm's stock price may reveal information to a variety of participants, including its strategic partners and competitive rivals. This paper establishes that when a firm discloses cost information it can confound decision-relevant demand information embedded in the stock price that observers 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 (less) on one dimension when its intent is to conceal (reveal) on another. Moreover, the firm's intent can be to either reveal or conceal information depending on what gives its partner the best competitive edge over its rival. Consequently, a firm's disclosure is made strategically, incorporating both valuation and competitive effects. Interestingly, the firm's disclosure strategy is designed in close concert with its production decision, i.e., the firm's optimal accounting and real decisions interact with each other for maximum impact.

Ram Ramanan is an Associate Professor of Accounting at the Indian School of Business (ISB). Before joining ISB, he served as a faculty member at the University of California, Davis and at SUNY, Binghamton.

Professor Ramanan’s research focuses on the role of accounting in management decisions. Specifically, he examines the incentive effects of financial reports and disclosures on various managerial decisions both inside an organisation and within supply chains. His work has been published in leading academic journals, including The Accounting Review, Journal of Accounting and Economics, The Review of Accounting Studies, Contemporary Accounting Research, Management Science, and Production and Operations Management.

At ISB Professor Ramanan teaches the core Managerial Accounting course and the elective in Strategic Performance Management.

Professor Ramanan holds a PhD in Accounting from the Kellogg School of Management, Northwestern University, and an MBA from the Indian Institute of Management, Bangalore. He is also a Chartered Accountant.

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