Do companies adapt their financial disclosures in accordance with the ease by which their stakeholders can access this information? To facilitate submission and dissemination of corporate filings, the Securities and Exchange Commission (SEC) Release No. 33-6977 from February 1993 mandated all SEC-registered firms to electronically submit all regulatory filings to the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system, an online system that allows anyone with internet access to immediately view the filings. Prior to the implementation of EDGAR, firms were required to mail in hard copies of their filings, which were first reviewed by SEC examiners and then made available in three reference rooms located in New York, Chicago, and Washington DC for public view. This paper-based filing system imposed significant challenges to public users: they could only access the filings by physically visiting the three reference rooms or by subscribing to commercial data services at a high cost. Therefore, the implementation of EDGAR represents a disruptive change that substantially reduced the information processing costs of SEC filings for anyone who is potentially interested in corporate information.
While most academic studies on the effect of EDGAR implementation focus on its benefits to investors, we are interested in other users of financial disclosures and how companies might strategically change the content of their disclosures in response to wider dissemination of such disclosures. We choose as our setting labor unions, as they represent regular employees that could benefit from improved access to firms’ disclosures for bargaining purposes, and examine whether firms facing strong organized labor alter their disclosures in response to the EDGAR implementation. Specifically, we investigate whether these firms strategically reduce the quantity and quality of their disclosures after EDGAR implementation to maintain their information advantage and bargaining position with organized labor. Our research is fruitful for two reasons. First, existing studies on EDGAR implementation take the information content of SEC filings as given and focus on EDGAR’s role in enabling capital market participants and their information intermediaries to better process and utilize the information from those filings. However, these studies ignore the possibility that firms could respond to EDGAR implementation by changing the quantity and quality of information in the EDGAR filings and other disclosures. To the best of our knowledge, our study is the first to investigate this issue by focusing on unionized firms, who have strong incentives to hide information from labor unions. Second, prior studies primarily document intended benefits associated with EDGAR implementation without considering potential costs. Our study aims to provide direct evidence on the strategic responses from the firms, which could represent a form of cost that is not expected by the regulators and thus have important policy implications.
The academic literature has documented that collective bargaining from organized labor affects firms’ willingness to publicly release financial information. This is because labor unions primarily rely on public disclosures for bargaining purposes, and withholding public disclosures may help firm managers maintain their information advantage and thus improve their bargaining position with labor unions. For example, one study provides field-study evidence that access to information is one of the key factors for local unions to secure favorable results. Other studies find that, relative to non-unionized peers, unionized firms pay higher wages and suffer more from declined growth, profitability, and operational flexibility. Renegotiated labor agreements on wages and work conditions that are overly favourable for employees can further hurt a unionized firm’s competitiveness in the product-markets.
The implementation of EDGAR held the potential to improve labor unions’ ability to process and utilize the information from SEC filings and thus to reduce the information advantages of the firm managers for three reasons. First, after the implementation, labor unions can instantaneously access all types of firm filings in electronic format. Before the implementation, although firms were required to mail their annual reports and proxy statements to registered shareholders, other types of regulatory filings such as Form 10-Qs (quarterly reports) and 8-Ks (current reports that disclose material corporate events) were not available in the mail. Form 10-Qs and 8-Ks are filed more frequently than Form 10-Ks (a detailed version of annual reports) and their shorter filing deadlines suggest that they contain timely information that are important to stakeholders.1 Besides, the electronic format of the filings coupled with immediate internet access allows labor unions to quickly disseminate the filings to all its members as well as financial and legal experts they consult with.2 Second, since EDGAR implementation also reduces information processing costs for information intermediaries including financial analysts and journalists, these parties should become better at highlighting important information and/or producing new information that is relevant to labor unions. Third, since unions often rely on industry information and information from peer firms to establish benchmarks for bargaining purposes, and EDGAR implementation gives easy and instantaneous access to filings by peer firms in the same industry, we also expect labor unions to upgrade information about their industries and their own firms by learning from those peer filings.
Therefore, we test the hypothesis that, to maintain their information advantage and bargaining position, firm managers facing strong organized labor, may strategically reduce the quantity and quality of their mandatory and voluntary disclosures after the implementation. We test our predictions using a sample of firms that gradually were mandated to submit their regulatory filings on EDGAR during 1994–1996 by comparing the disclosures of firms that already switched to EDGAR (i.e., the switchers) with firms that have not yet switched (i.e., the non-switchers), disentangling the effect of the implementation from other confounding factors that could affect both switchers and non-switchers. In term of mandatory disclosures, we find that firms facing strong organized labor reduce the details in their financial statements after the implementation of EDGAR, which arguably makes financial statements less useful to labor unions for collective bargaining purposes. In term of voluntary disclosures, we find that the likelihood and frequency of management forecasts and the proportion of good news forecasts all decrease for firms facing strong organized labor after the implementation of EDGAR. In addition, we document that the effect of EDGAR implementation on firms’ disclosure is exacerbated for firms whose establishments are more distant from the SEC reference rooms for paper-based filings – making it more difficult for the unions to access the information pre-EDGAR, for firms with less educated employees who are arguably less able to utilize information from paper-based filings pre-EDGAR, and for firms under greater pressure to limit the costs of their bargaining with labor unions (for example, those with greater pension obligations, higher profitability, or less peers phasing-in EDGAR, which makes firms’ own information more valuable). Finally, corroborating our main findings, additional analyses suggest that, to facilitate their labor negotiations, firms facing strong organized labor make their financial statements less comparable to those of their peers, delay their earnings announcements, increase the pessimism in their management forecasts, and lower their accounting earnings by engaging in downward earnings management. Regarding the consequences of strategically reducing disclosures, we find that for firms facing strong organized labor, their strategy fails to fully overcome the effect of EDGAR implementation in reducing their managers’ information advantage, and thus their overall information environment improves after EDGAR implementation. As managers’ information advantage gets eroded, firms respond to weakened bargaining position by altering their financial policies, while labor unions increase bargaining power and obtain more pension benefits.
Our study is the first to investigate the implication of information processing costs to labor markets and to examine firms’ strategic responses to the implementation of EDGAR. We document an unintended consequence that some of the firms actually reduce the quantity and quality of their disclosures, which should be informative to regulators and standard setters. More importantly, our evidence suggests that the improvement to firms’ information environment caused by a regulator-imposed change (i.e., EDGAR implementation) has much wider implications beyond the equity markets investigated by the literature. Our study takes an initial step at providing evidence on the implications of EDGAR implementation for the labor market, which improves our understanding on the dynamic effects and real outcomes of the implementation. Similarly, other contracting parties (e.g., suppliers and customers) may also be affected by EDGAR implementation because it could also reduce the information advantage of firm managers in their negotiations. It is important to better understand how other contracting parties react to the implementation and the impact of the implementation on the outcomes of other types of contracts.
Daniel Aobdia is an Associate Professor of Accounting and PricewaterhouseCoopers LLP Research Fellow at the Smeal College of Business, The Pennsylvania State University. He was a Senior Economic Research Fellow in the Center of Economic Analysis at the Public Company Accounting Oversight Board (PCAOB) between September 2014 and September 2016. This research was conducted after his affiliation with the PCAOB ended.
Lin Cheng is Professor of Accounting and Department Chair of Finance and Accounting at China Europe International Business School (CEIBS).
Qin Tan is an Assistant Professor of Accounting at the City University of Hong Kong.
Xuan Wu is an Assistant Professor of Accounting at the Harbin Institute of Technology, Shenzhen.
This post is adapted from their paper, “EDGAR Implementation, Unionization, and Strategic Disclosure”, available on SSRN.
The views expressed in this blog and the paper are the views of the authors and do not necessarily reflect the views of the board, individual board members, or staff of the PCAOB.
