The Disclosure of Good versus Bad News: Evidence from the Biotech Industry

Abstract

This paper examines how the type of news affects firms’ product–level voluntary disclosures. Our sample is publicly–traded biotech firms, a setting which provides strong empirical identification via (i) hand–collected product–level disclosures as our dependent variable, and (ii) product–level evidence of individual drugs’ progression through key regulatory milestones towards marketability as our experimental variable. Of note, the disclosures allow us to distinguish firms’ disclosure treatment of good news (i.e., when drugs progress towards marketability) versus bad news (i.e., when drugs fail a key milestone). We document three key empirical findings: (i) product disclosure is increasing in good news (consistent with benefits such as reduced information asymmetry); (ii) product disclosure is increasing in bad news (consistent with benefits such as reduced litigation costs); and more importantly (iii) product disclosure is higher for good news relative to bad news. Collectively, our findings suggest that managers perceive net benefits associated with voluntary product–level disclosure as increasing with the degree of both good and bad news, and that the perceived benefits to disclosure are greater for good news relative to bad news.