Do Innovations Hoard Bad News? Evidence from Stock Price Crash Risk

Abstract

Do opportunistic managers use innovation activities to manipulate information flow to equity market? Using a large sample of U.S. firms, we show that innovation-related activities alleviate managers’ opportunistic behavior to withhold bad news. Specifically, we document a significantly negative relation between the number of patents (citations) and the likelihood of experiencing firm-specific stock price crashes in future. Our findings are consistent with the arguments that innovation activities discipline managers to enhance the revelation of firm-specific information. Further, we find that such impact of innovations on stock price crashes is more pronounced in firms with weak corporate governance and high information opacity. Our findings provide new evidence on the real effects of innovations on equity market.

Keywords: Crash risk, Innovations, Information hoarding

JEL Classification: G14, G30, G32, M40, O31