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

• In Event: The Effects of Disclosures

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.

Authors

• Shiu-Yik Au Au, University of Manitoba, Asper School of Business

• Hongping Tan, McGill University