Social Capital, Product Market Competition and Corporate Disclosure of Proprietary Information

Abstract

We examine the impact of social capital in local communities on corporate disclosure of proprietary information. Firms located in communities with higher social capital care more about the collective interests of the local communities. While the disclosure of proprietary information has the benefit of improving stock prices, the proprietary information revealed can be exploited by the firm’s product market rivals to its disadvantage and impose significant costs on both investors and the local community. Thus, when managers take the interests of local communities into consideration, they will view the disclosure of proprietary information to be a more costly action compared to those who only consider investors’ interests alone. Our empirical analysis confirms that firms located in communities with higher levels of social capital are associated with less disclosure of proprietary information. In addition, we find that the negative association between social capital and the disclosure of proprietary information is more pronounced for firms facing higher proprietary cost, with lower external financing dependence or with higher long-term institutional ownership.