Do Innovative Firms Communicate More?

The worry that a competitor will steal a big idea keeps some innovators from sharing the details. But new research from the University of Maryland finds that the most innovative firms see more value in sharing information about new advances than keeping it under wraps.

Maryland Smith accounting professor Tharindra Ranasinghe finds that successful innovation, measured in patents, leads firms to issue more voluntary management forecasts to keep investors happy, which can then spur more investment in the firm.

Ranasinghe worked with three researchers from Singapore Management University, the Hong Kong Polytechnic University, and the University of Toronto on the research, forthcoming in The Accounting Review. They examined U.S. patent grants as an indicator of innovation success for an array of firms. They measured the number of patents and citations firms were awarded as a proxy for the quantity and quality of a company’s innovation.

“The findings indicated that firms issued more voluntary management forecasts following a patent grant, suggesting that on average and at least in our context, the benefits of additional disclosure are perceived to outweigh the costs,” write the researchers.

After a successful innovation, investors want to see voluntary disclosures to learn more about the new product or technology and the short- and long-term financial implications for the company. But disclosure also comes with high proprietary costs, say the researchers, because competitors can glean the same information from public disclosures. But even weighing this risk, the researchers found that management forecasting behavior increases after a firm is granted a new patent, suggesting that firms see the benefits of additional disclosure as outweighing the potential costs that could come with disclosing the innovation.

The researchers measured innovation in terms of patent grants, which have certain legal protections. Patents are a stronger measure of innovation than money spent on research and development because they show innovation that has come to fruition.

The researchers find more voluntary management guidance after patents for firms with higher institutional ownership. They also find the activity increased after the U.S. Securities and Exchange Commission created the Regulation Fair Disclosure rule in 2000 that says public companies have to share any voluntary disclosures publicly, not just with select shareholders and certain parties. The findings hold true for both short- and long-term forecasts.

“These outcomes are suggestive of innovative firms responding to investors’ information demands,” write the researchers.

However, the researchers find that the benefits of informations sharing don’t always outweight the costs.

“We also find that firms with greater competition are less likely to increase management forecast issuance following a patent grant, indicating that proprietary costs of disclosure remain an important issue.”

Read more: “Do Innovative Firms Communicate More? Evidence from the Relation Between Patenting and Management Guidance,” is featured in The Accounting Review.