Information Transparency and Profitability Convergence

We investigate the effect of information transparency on the competitive environment by examining whether information transparency at the industry level is associated with industry-level earnings persistence. Theory predicts that competition reduces the sustainability of abnormally high and abnormally low profits, thereby reducing overall earnings persistence. Therefore, if information transparency facilitates competition, we expect more transparent industries to have lower earnings persistence. We measure industry-level information transparency as the industry-level future earnings response coefficient. Consistent with our expectation, we find that transparency is associated with lower earnings persistence. This finding suggests that information transparency facilitates the competitive forces that lead profits to converge within an industry. We corroborate this interpretation by demonstrating that information transparency is positively associated with the degree to which competitors enter or exit an industry in anticipation of changes in the industry’s profitability outlook. Our study provides new and important evidence that information transparency facilitates product market competition