ISB study says companies use disclosure strategies to reduce regulatory scrutiny

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ISB study: Disclosure and scrutiny

Highlights

A study by ISB's Ram N V Ramanan and Anil Arya says companies may adopt a positive disclosure strategy to reduce regulatory scrutiny.
When faced with regulatory and competitive pressure at the same time, companies can share positive information to make their market power appear weaker and avoid a tough regulatory response.
According to the study, when the regulator is sufficiently strong, a disclosure policy can yield a net benefit if the gains from regulatory relief outweigh the competitive losses.

This article was translated from the original. Read the original version by our correspondent here.

Disclosure strategy: Model and findings

According to Forbes India, the study published in ISB Discover shows that when a company faces both a regulator and a potential new rival, disclosing a positive outlook can benefit the company rather than backfire. The study examines how the simultaneous presence of a regulator and a competitor changes a firm's disclosure strategy.

The study's main finding is that neither party responds only to the information disclosed; both also take into account how the other might respond. Generally, signaling strong business performance can invite greater regulatory scrutiny and encourage a potential rival to enter the market. But when both pressures are present, the same signal can make the company's market power appear weaker, drawing less attention from the regulator.

The study notes that, viewed separately, the responses of both the regulator and the potential rival are unfavorable to the company, so the conventional strategy is thought to be to disclose bad news and conceal good news. But the effect of combined pressure is not merely additive: the presence of both parties can completely change a company's disclosure policy.

Industry and regulatory implications

In the authors' model, the company operates as a monopolist. The regulator seeks to limit its market power, while a potential entrant wants to enter the market if the prospect of sufficient profits makes it worthwhile. In this framework, sharing positive information can invite greater competition in the product market, but the same move can help reduce regulatory pressure and compliance costs.

The study identifies three key forces. First, a company may deliberately share positive news and accept a limited form of strategic harm to itself. Second, increased competition can soften the regulator's response because the company's monopoly power appears relatively weaker. Third, if the benefit of regulatory relief exceeds the losses caused by a new rival, this strategic self-harm can result in a net gain for the company.

According to the study, this effect is particularly pronounced when the regulator is sufficiently strong. This suggests that disclosure is not merely a tool for communicating with investors, but can also be a business strategy for balancing competition and regulation.

The Centre's disinvestment programme has relied prominently on market-based instruments (ETFs, public offerings, buybacks, etc.), as we have previously reported, while strategic sales have played a comparatively limited role. The same article noted that the proposed stake sale in IDBI Bank could change this picture and that, if completed, disinvestment proceeds for the current fiscal year could exceed the budget estimate.

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