When Does Information Disclosure Help Innovation? Evidence from Blue Sky Laws

Abstract

Using historical firm-level patent and accounting data, we analyze how information disclosure affects firm innovation. To establish a causal link, we use the enactment of blue sky laws, the first form of investor protection laws, across some U.S. states at the beginning of the 20th century, when there was no federal regulation. These laws required firms to disclose information before selling their securities and increased penalties in case of financial fraud. Using archival records, we document that young innovative firms (startups) had a large share of intangible assets and relied heavily on equity financing (venture capital). In a difference-in-differences setting, we show that following the enactment of these laws, innovative firms that previously had limited access to external finance raised more funds and increased their innovation activity. Our results suggest that disclosure requirements help innovation when the information environment is weak to begin with.