Strict accounting laws, designed to help shareholders gain better insight into corporations, may ultimately harm a firm’s competitive position by forcing disclosure of proprietary information, according to Ying Zhou of the University of Connecticut, who has spent years analyzing the consequences of such mandates.

Zhou, assistant professor of accounting in the School of Business, presented her findings in January at the 2018 Financial Accounting and Reporting Section Meeting in Austin, Texas.

The focus of her research circles around a new requirement, widely implemented in 1998, that required companies to expand their segment disclosure. Previously, enterprises grouped products and services by industry lines. The loose definition of “industry” permitted flexibility and allowed managers of some diversified firms to report all operations in a single, broadly defined segment.

Under the original requirements, some large companies combined information about their myriad businesses in one report, failing to distinguish different factions of the business. They often cited proprietary information as the reason.

To study the impact of the new requirements, Zhou collected written evidence from companies that lobbied against the changes citing a competitive disadvantage. She tracked and studied 138 of those firms, examining their performance both two years prior to the initial proposal and two years after the accounting change was implemented.

“The results lend support to corporate concerns about competitive harm caused by extensive disclosure,’’ Zhou said. “Some of this information can truly be proprietary.”

With the new requirements, called SFAS-131, regulators had sought more expansive disclosure citing the interest of informing and protecting investors. The information revealed was not previously available through other channels. The Financial Accounting Standards Board adopted SFAS-131, noting that financial preparers could provide the additional information promptly and inexpensively.

An overwhelming majority of lobbying firms opposed the proposal and argued for a competitive-harm exemption, saying the reporting plan could compromise firms’ strategic and competitive interests.

In her study, Zhou found that among those companies that objected to the new accounting requirements, operating performance declined for firms that changed their segment reporting, but not for those that continued to report the same segments. She tested her results by comparing a separate control group.

Further analysis revealed that although there was little change in sales growth but a significant increase in selling, general, and administrative expenses per dollar of sales, suggesting an unusual sales effort to maintain market share in an intensified competitive environment. Segment profitability analysis showed that the decline in performance is attributable to the new segments disclosed under the new rule.

“In accounting literature, the existence of propriety costs has been used extensively as the rational explanation for non-disclosure in many settings,’’ she said. “However there is little evidence that mandatory disclose of propriety information really results in competitive harm—until now.’’