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

Abstract

Using textual analysis of a large sample of 10-K filings for US firms, we find a negative relationship between the extent of risk disclosure and corporate innovation as measured by R&D, patents, and citations. By exploiting two exogenous shocks, we find that it is the increase in the extent of risk disclosure rather than a change in fundamental firm risk that reduces corporate innovation. Further analysis shows that the channel for the innovation decline is due to financial constraints, with 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.