The Paradox of Innovation Non-Disclosure: Evidence from Licensing Contracts
63 Pages Posted: 19 Jan 2017 Last revised: 9 Sep 2022
Date Written: July 15, 2021
Innovative firms face a trade-off between disclosing to investors and maintaining secrecy from competitors. We study this trade-off in a sample of intellectual property (IP) licenses mandatorily disclosed by US public firms, whose contents can be temporarily redacted. Hand-classifying the redacted information, we show that firms with valuable IP in competitive markets redact more often. Despite increased information asymmetry, markets react positively to redaction of IP-specific information, suggesting non-disclosure signals valuable IP. The within-firm positive returns response is pronounced in the presence of innovation-oriented institutional owners and dampened when they are distracted. Our results suggest that credible non-disclosure partially resolves information frictions for innovative firms in public markets when facilitated by sophisticated investors.
Keywords: Innovation, Disclosure, Redaction, Licensing, Patents, R&D
JEL Classification: G30, G38, O30, O32, O34
Suggested Citation: Suggested Citation