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

48 Pages Posted: 30 Sep 2017 Last revised: 23 Sep 2018

See all articles by Shiu-Yik Au

Shiu-Yik Au

University of Manitoba - Asper School of Business

Hongping Tan

McGill University

Date Written: September 12, 2018

Abstract

Consistent with theoretical models that less disclosure is desirable when the manager cannot easily report the benefits of investments, we find that mandatory risk disclosure is negatively associated with corporate innovation based on a textual analysis of 43,127 10-K filings for US firms during 1994 to 2010. Using two natural experiments and a regression discontinuity design, we find that mandatory risk disclosure exacerbates its adverse impact on innovation. Firms with financial constraints experience larger declines in innovation with risk disclosure. These results suggest that mandatory risk disclosure requirement can have unintended real consequence for financially constrained firms.

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 (September 12, 2018). 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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