The Importance of Regulatory Shifts in 8-K Disclosures on Corporate Innovation

Abstract

Completeness and timeliness are two properties of firm disclosures valued by investors and promoted by standard setters in their conceptual frameworks of financial reporting. Nevertheless, prior studies suggest that these two properties may have opposing effects in that completeness could increase while timeliness could decrease corporate innovation. Exploiting the regulatory change in 2004 for 8-K disclosures as a quasi-natural experiment, we document that enhanced completeness and timeliness of firm disclosures increase firm innovation output. We also find that the increase in innovation output is larger for firms whose managers face higher career risks for innovation failures and firms whose investors struggle to monitor their innovation activities. Finally, we show that the increase in innovation output is concentrated in firms that disclose more innovation-related activities after the regulatory change and that firms not only dig deeper into their existing knowledge pool, but also explore more outside of it.