Inflexible Prices and Firm Transparency

Firms' inflexibility in adjusting output prices suppresses the revelation of how input-cost shocks affect firms' profits. We find output-price inflexibility exacerbates information asymmetry between corporate insiders and outsiders, especially when information about the input cost is less publicly available. Specifically, for inflexible-price firms, transparency of the input-cost structure reduces their equity-return volatility, bid-ask spread, analysts' earnings forecast dispersion, and the yield spread of corporate bonds. Moreover, textual analysis reveals that during conference calls, analysts request more material information about inflexible-price firms’ production costs, and they are more likely to do so if the firm's input cost is less transparent. To mitigate the adverse effect of information asymmetry, managers of inflexible-price firms disseminate more cost information in conference calls and more frequently manage expectations of financial analysts. Our results suggest output-price inflexibility constitutes a source of capital-market frictions.