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

Abstract

Using textual analysis of 10-K filings for US firms, we find that the SEC mandate for risk disclosure has a negative effect on both inputs and outputs of corporate innovation, with no corresponding decrease in other less risky investment. By exploiting two SEC regulation changes as quasi-natural experiments, we conduct differences-in-differences and regression discontinuity design tests and identify that it is the mandate for risk disclosure that reduces corporate innovation. Further analysis shows that risk disclosure having a larger negative impact on innovation among firms with financial constraints. These results are consistent with theoretical predictions that increased disclosure can have unintended 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