Financial information, spillovers, and innovation performance

Abstract

We hypothesize that high-quality financial information can, through its spillovers to peer firms’ strategic decision-making, have an adverse effect on the disclosing firm’s innovation performance. Using the degree of disaggregation in financial reports and patent-based measures to proxy for financial information quality and significance of innovative outputs, respectively, we find that the patented inventions of firms with more disaggregated financial reports are less innovative. We also document that the negative association is more pronounced for firms with more intense product market threats, a situation in which the spillover of more detailed information is costlier. We further validate our argument by documenting that disclosures of more and finer information actually help peers increase innovation activities and investments, consistent with the peers’ effective strategic responses to the disclosing firm’s innovation. Overall, the results from the cross-sectional analysis and validation tests confirm the channel through which more disaggregated financial information can lead to a decline in firm innovation performance. This study contributes to the literatures on information spillovers, economic consequences of financial reporting, proprietary costs of disclosures, and innovation.