The Voluntary Disclosure of Advertising Expenditures: The Case of the Pharmaceutical Industry and Healthcare Reform

This paper investigates whether pharmaceutical firms were less likely to disclose advertising costs in response to the debate over healthcare reform. In 1994, the Securities and Exchange Commission (SEC) issued Financial Reporting Release No. 44 (FRR No. 44), which no longer required the disclosure of advertising. The results indicate that starting in 1994 the disclosure of advertising declined for all firms. This finding is consistent with all firms facing a level of proprietary costs and discontinuing the disclosure of advertising after FRR No. 44 was issued. However, for larger and more profitable pharmaceutical firms, there is an incremental effect as those firms were less likely to disclose advertising suggesting that these firms potentially faced increased-political costs and responded by not disclosing advertising costs consistent with the research hypotheses.