Discretionary Disclosure and Manager Horizon: Evidence from Patenting

56 Pages Posted: 24 Mar 2017 Last revised: 16 Feb 2019

See all articles by Stephen Glaeser

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill - Accounting Area

Jeremy Michels

University of Pennsylvania - Accounting Department

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Date Written: February 14, 2019

Abstract

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

Glaeser, Stephen and Michels, Jeremy and Verrecchia, Robert E., Discretionary Disclosure and Manager Horizon: Evidence from Patenting (February 14, 2019). Available at SSRN: https://ssrn.com/abstract=2939852 or http://dx.doi.org/10.2139/ssrn.2939852

Stephen Glaeser

University of North Carolina (UNC) at Chapel Hill - Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599
United States

Jeremy Michels (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Robert E. Verrecchia

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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