Strategic Disclosure in R&D Races: Theory and Evidence

Abstract

We examine the determinants of firms' voluntary disclosure of intermediate success in R&D races both analytically and empirically. In our model, a firm's announcement of its intermediate success has an ambivalent effect on its rival. It encourages the rival to stay in the race by resolving the uncertainty about project feasibility, but also deters the rival because it indicates an enlarged technological gap. Thus, a firm discloses its intermediate success only when its rival is sufficiently weak that the deterrence effect dominates. We test our predictions using disclosure of clinical trials in the drug development process. Consistent with our predictions, we find that a pharmaceutical firm is more likely to voluntarily disclose early phase clinical trial initiations when its rivals have done fewer trials in the same therapeutic area. Such a negative association is more pronounced in therapeutic areas with lower clinical trial costs, higher probability of success, and larger market size. 

Keywords: voluntary disclosure, drug development, proprietary cost, R&D races

JEL Classification: D83, G30, M40, O31, O32