The Effect of Financial Reporting on Strategic Investments: Evidence from Purchase Obligations

I examine whether mandating the disclosure of investments influences firms’ strategic interactions. I exploit an SEC regulation requiring firms to report off-balance sheet purchase obligations, such as commitments to inventory purchases, CAPEX, R&D, and advertising. Motivated by theory on strategic investments, I predict and find that firms increase investments if they have substitutive product market strategies with competitors and decrease investments if they have complementary strategies. This two-way finding is consistent with firms strategically using investments to influence competitors’ behavior. I show that changes in investments are concentrated among dominant firms (i.e., oligopolistic firms with large market shares), especially those with more irreversible investments, which have a greater ability to influence competitors’ actions. I also show that such changes in investments have real effects on firms’ sales growth, profit margins, and market share. Collectively, my results illustrate a novel channel through which financial reporting shapes firms’ investments and competition.