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

56 Pages Posted: 30 Sep 2017 Last revised: 25 Apr 2021

See all articles by Shiu-Yik Au

Shiu-Yik Au

University of Manitoba - Asper School of Business

Hongping Tan

McGill University

Date Written: April 24, 2021

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

Suggested Citation

Au, Shiu-Yik and Tan, Hongping, Too Much of a Good Thing? Risk Disclosure and Corporate Innovation (April 24, 2021). 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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