Excessive Information Disclosure: Impact on Profits and Innovation

A company’s profit is primarily dependent on its resources and investments, both of which come from potential investors. As a result, enterprises must develop a favorable image in the eyes of potential investors. Hence, it is necessary for firms to establish a positive image in the eyes of potential investors. The information presented by the firms is one of the primary sources that investors rely on to make better judgments about buying and selling stocks. However, according to the Chicago Booth Review, too much information might harm a company’s profits and innovation.

The article opens by stating that having more information about a company allows investors to make better judgments about buying and selling stocks, which is one of the reasons that global securities authorities mandate publicly listed enterprises to make certain disclosures. However, according to Chicago Booth’s Philip G. Berger, Stanford’s Jung Ho Choi, and Southern Methodist University’s Sorabh Tomar, certain disclosures may be necessary for businesses, but disclosing too much information might harm productivity, profits, and innovation. The researchers investigated what happened when South Korean authorities reduced reporting requirements for the largest expense item in company income statements, cost of sales (CoS). Their findings suggest that businesses were more motivated to innovate when they had to disclose less information because they knew that competitors could not simply read the financial statements and copy cost-side innovations. This increased productivity and revenues for organizations that disclosed less information. Companies that opted not to disclose raw material, labor, and overhead cost figures reported greater profit improvements than their competitors. In a nutshell, the researchers discovered that, while businesses’ profit ratios may have risen as a result of not needing to reveal as much information, increasing corporate profitability may not translate to stronger economic growth as a result of this. According to the researchers, nondisclosure of cost information may prevent foreign competitors from learning about local businesses’ cost advantages, which will eventually make the relationship between disclosure regimes and economic growth more complex in open markets than in closed ones.

Profits and innovation are two of the most important topics to focus on in the corporate world. The preceding text suggests how these may be harmed as a result of excessive information disclosure.