The spillover effects of innovation content disclosure in MD&A

Abstract

We examine the spillover effects of innovation-related content from peer firms' MD&A to firm's innovation activities. We find that firms invest more in R&D when facing the circumstances that their rivals (i.e., other firms in the same industry with it) present more about innovation in their MD&A. Outcome-based social learning and competition are two major channels through which peer firms' disclosure has impact on corporate innovation activities. Moreover, the spillover effects of the tone on corporate R&D investment are fully mediated by the innovation content. The spillover effects are more pronounced when its rivals' financial statements are more comparable, rivals exercise less real earnings management, and the firm is non-state-owned enterprise (non-SOE). A regulation change in 2012 that required firms to disclose more proprietary information in MD&As strengthens the spillover effects of MD&A disclosure. The spillover effects of innovation contents in MD&A are not driven by either the information content (whether the content is forward-looking or not) or the economic connections between a firm and its peers. Peer firms' innovation disclosure also has implication to corporate innovation disclosure, patent application, R&D efficiency and firm value. Overall, we reveal the positive externalities of corporate disclosure of innovation information.