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

44 Pages Posted: 30 Sep 2017 Last revised: 29 May 2019

See all articles by Shiu-Yik Au

Shiu-Yik Au

University of Manitoba - Asper School of Business

Hongping Tan

McGill University

Date Written: May 28, 2019

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

Suggested Citation

Au, Shiu-Yik and Tan, Hongping, Too Much of a Good Thing? Risk Disclosure and Corporate Innovation (May 28, 2019). Available at SSRN: https://ssrn.com/abstract=3043952 or http://dx.doi.org/10.2139/ssrn.3043952

Shiu-Yik Au (Contact Author)

University of Manitoba - Asper School of Business ( email )

181 Freedman Crescent
Winnipeg, Manitoba R3T 5V4
Canada
(204) 474-9783 (Phone)

Hongping Tan

McGill University ( email )

1001 Sherbrooke St. West
Montreal, Quebec H3A1G5 H3A 2M1
Canada

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