When will companies talk more about innovation? A natural experiment of intellectual property protection

Abstract

We argue that strong protection of intellectual property rights lowers proprietary costs faced by companies, thereby safeguarding their disclosure of innovation information. This paper employs a natural experiment in China to investigate whether and how enhanced intellectual property judicial protection affects firms' innovation narrative practices. We find robust evidence that firms increase the narrative innovation disclosure after the establishment of intellectual property courts. In cross-sectional analyses, we observe that this effect is particularly pronounced in industries characterized by higher degree of R&D spillovers and among firms with weaker product market competitiveness. The findings are also more significant for firms operating under conditions of elevated information asymmetry and intensified financing constraints. Finally, we empirically demonstrate that heightened narrative innovation disclosure after the establishment of intellectual property courts has a deterring effect in decreasing the product similarity among peer firms. Our study investigates how judicial enforcement of intellectual property rights shapes corporate disclosure practices and has policy implications for both product and capital markets.