The Impact of Private Channel on Information Disclosure - Evidence from Board Network and R&D Narrative

Abstract

Firms weigh the costs of public disclosure against the benefits of information transparency when disseminating narrative R&D information. In this paper, we examine whether firms with private information dissemination channels will reduce their public disclosure of narrative R&D information by investigating the effect of director network connections on firms’ narrative R&D disclosure. Consistent with our expectation, we find that firms with better-connected directors disclose less narrative R&D information. This association is stronger for firms with: (1) higher litigation risk, (2) larger proprietary costs, (3) more opportunities to interact with directors at other firms, and (4) weaker corporate governance. We also find that narrative R&D information flows through director networks to information users such as institutional investors and industry peers. Our results remain robust to employing the staggered adoption of the Universal Demand laws and the Inevitable Disclosure Doctrine as quasi-natural experiments, addressing the Reg FD effect, measuring the content of narrative R&D disclosure, and using alternative measures of board networks. Collectively, our findings suggest that director connections may serve as a private channel of disseminating narrative R&D information, substituting for the public channel of disclosure.