Proprietary versus Nonproprietary Disclosures: Evidence from Germany

Christian Leuz

in The Economics and Politics of Accounting

Published in print March 2004 | ISBN: 9780199260621
Published online January 2005 | e-ISBN: 9780191601668 | DOI:
 Proprietary versus Nonproprietary Disclosures: Evidence from Germany

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Discretionary disclosure theory suggests that proprietary costs are an important reason why firms often withhold material information, but empirically testing this hypothesis has proven to be difficult because of the elusive nature of proprietary costs and lack of settings in which proprietary disclosures are voluntary. Until recently, German firms were not required to disclose business segment reports, which are generally viewed as competitively sensitive and proprietary in nature; an analysis of voluntary business segment disclosures of firms finds evidence that is consistent with the proprietary cost hypothesis. As Germany now requires segment reporting by all listed firms, an ex post examination is made to determine whether segment reporting is more revealing for those firms that previously chose not to disclose. It is found that firms are less likely to provide segment reports voluntarily if segment profitability is more heterogeneous and the average profitability reported in the income statement is less revealing; this finding is also consistent with the proprietary cost hypothesis and shows that segment disclosures are not governed by capital-market considerations alone. The findings are benchmarked using voluntary cash flow statement disclosures, because these are less competitively sensitive than segment reports, which are likely to reveal proprietary information to competitors; the finding here is that cash flow disclosures appear to be governed primarily by capital-market considerations, and this lends further support to the proprietary cost interpretation of the segment reporting results.

Keywords: business segment reports; capital-market considerations; cash flow statements; disclosure; disclosure theory; discretionary disclosure theory; financial disclosure; Germany; non-proprietary disclosure; proprietary cost hypothesis; proprietary costs; proprietary disclosure; voluntary disclosure

Chapter.  14277 words. 

Subjects: Financial Markets

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