A Measure of Competition Based on 10‐K Filings

Feng Li · Russell J. Lundholm · Michael Minnis

406 citations0/0 files storedJournal of Accounting Research

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Auditing, Earnings Management, Governance Corporate Finance and Governance Merger and Competition Analysis

Abstract

ABSTRACT In this paper we develop a measure of competition based on management's disclosures in their 10‐K filing and find that firms’ rates of diminishing marginal returns on new and existing investment vary significantly with our measure. We show that these firm‐level disclosures are related to existing industry‐level measures of disclosure (e.g., Herfindahl index), but capture something distinctly new. In particular, we show that the measure has both across‐industry variation and within‐industry variation, and each is related to the firm's future rates of diminishing marginal returns. As such, our measure is a useful complement to existing measures of competition. We present a battery of specification tests designed to explore the boundaries of our measure and how it varies with the definition of industry and the presence of other measures of competition.

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1776An Inquiry into the Nature and Causes of the Wealth of Nations 2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1993The cornerstones of competitive advantage: A resource‐based view 2011When Is a Liability Not a Liability? Textual Analysis, Dictionaries, and 10‐Ks 1997Industry costs of equity 1989How Competitive Forces Shape Strategy 2006Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 2010Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis

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