The Paradox of Innovation Non-Disclosure: Evidence from Licensing Contracts

63 Pages Posted: 19 Jan 2017 Last revised: 20 Jul 2021

See all articles by Gaurav Kankanhalli

Gaurav Kankanhalli

University of Pittsburgh - Katz Graduate School of Business

Alan Kwan

The University of Hong Kong

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Date Written: July 15, 2021

Abstract

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 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

Kankanhalli, Gaurav and Kwan, Alan and Merkley, Kenneth J., The Paradox of Innovation Non-Disclosure: Evidence from Licensing Contracts (July 15, 2021). Available at SSRN: https://ssrn.com/abstract=2902341 or http://dx.doi.org/10.2139/ssrn.2902341

Gaurav Kankanhalli (Contact Author)

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Alan Kwan

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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