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  5. The Paradox of Innovation Non-Disclosure: Evidence from Licensing Contracts

The Paradox of Innovation Non-Disclosure: Evidence from Licensing Contracts

  • Gaurav Kankanhalli
  • Alan Kwan
  • Kenneth Merkley
American Economic Journal: Applied Economics (Forthcoming)

Abstract

Innovative firms must trade off disclosing to investors and maintaining secrecy from competitors. We study this trade-off in a sample of IP licenses mandatorily disclosed by U.S. public firms, whose contents can be temporarily redacted. Hand-classifying the redacted information, we find that firms with valuable IP in competitive markets redact IP information more often. Markets react positively to the redaction of IP information, consistent with theoretical predictions rationalizing a separating equilibrium in which non-disclosure signals more valuable IP. Our results suggest that credible non-disclosure partially resolves information frictions for innovative public firms when facilitated by sophisticated investors.

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