Too Much of a Good Thing? Risk Disclosure and Corporate Innovation

Abstract

Consistent with theoretical models that show disclosure can reduce uncertain investments, we find that mandating risk disclosure is negatively associated with corporate innovation. Using a textual analysis of a large sample of 10-K filings for US firms, we identify a negative relationship between risk disclosure and firm-level investments in R&D and innovation output in terms of patents and citations. Furthermore, the channel for this decline seems to be linked to financial constraints, with risk disclosure having a larger impact on innovation among firms with financial constraints. These results suggest that a mandatory risk disclosure requirement can have unintended real consequences for firms making uncertain investments, such as innovation.

Keywords: Risk, disclosure, innovation, patents, research and development, 10-K filings, Item 1A

JEL Classification: G30, M40, O30, O31, O32