How Competitive Costs and Board Reputation Concerns Affect Disclosure: Evidence from Performance Targets

We use a 2006 Securities and Exchange Commission regulation that requires firms to disclose the numerical target for executive bonus plans to examine how firm-specific measures of proprietary costs and board member’s reputation concerns influence a firm’s disclosure decisions. Using a composite measure of board strength we find that in the first year of the requirement, board strength is positively associated with disclosure. This result suggests that board members who are more concerned about their reputation encourage disclosure to increase their standing with the SEC and stakeholders. Using unexpected earnings and the three-year average of industry-adjusted gross profit as firm-specific measures of proprietary costs, we find that both measures are negatively related to disclosure, but that strong boards are more likely to consider newly acquired proprietary advantage as reflected in unexpected earnings. As a result, the two measures appear to capture different aspects of perceived proprietary costs. Overall, our results provide insight into the influence of board members and firm-specific proprietary costs on a firm’s disclosure decisions.