Innovation and annual report readability

Abstract

We explore the relationship between innovation and annual report readability using multiple innovation metrics. While lower readability can boost innovation, an inverted U-shaped link with patents suggests that excessive opacity becomes counterproductive. We identify two underlying mechanisms—preserving competitive advantages and concealing risks. Consistent with the first mechanism, the innovation-readability link is stronger in competitive markets, where firms reduce transparency to better protect themselves from competitors. In line with the second mechanism, the innovation-readability link is stronger for riskier firms. Overall, our findings support the idea that firms strategically tailor their disclosure to match their innovation needs.