Discretionary Disclosure and Manager Horizon: Evidence from Patenting
56 Pages Posted: 24 Mar 2017 Last revised: 16 Feb 2019
Date Written: February 14, 2019
We examine the relation between manager horizon and discretionary disclosure using patenting as a measure of disclosure. We argue that patenting reflects, in part, a manager’s decision to credibly disclose the successful outcome of research and development (R&D) projects. When a firm invests in R&D, but does not patent, investors are unsure whether the absence of patenting reflects failed R&D projects or successful innovations that the firm chose not to patent. We suggest that investors’ uncertainty about a manager’s horizon – whether the manager seeks to maximize short-term stock price or long-term profits – moderates investors’ reaction. When investors are more certain that a manager’s horizon is short, they expect the manager to disclose the outcome of successful investments and therefore discount nondisclosure to a greater degree. Based on this framework we predict managers will patent more when incentives to maximize current price are greatest and that investors will discount the value of non-disclosing firms to a greater degree when managers are likely to have shorter horizons. We find evidence consistent with these predictions using a variety of measures for manager horizon.
Keywords: Discretionary disclosure, voluntary disclosure, manager horizon, patents, trade secrets, innovation, research and development.
JEL Classification: M41, O32
Suggested Citation: Suggested Citation