Study finds financial transparency can stifle corporate innovation

Financial transparency can inadvertently discourage companies from investing in new ideas and technologies, according to new research from the School of Management.

Forthcoming in The Accounting Review, the study found that a public firm’s inclusion in the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) database leads to a decline in investment in innovation. Introduced in 1993, the database transformed the way corporate disclosures are collected, processed and disseminated by increasing access to public companies’ financial reporting and making regulatory filings available electronically, which can ultimately broaden a firm’s investor base.

“Knowledge or information gained by one company that spreads to others without compensation can reduce their incentive to invest in creating new things,” says study co-author Michael Dambra, associate professor, and Kenneth W. Colwell, chair of the Department of Accounting and Law. “Our findings highlight the societal cost of regulation and the complex trade-offs between transparency and innovation in today’s competitive business environment.”

To assess the impact of the EDGAR database on corporate innovation, Dambra and fellow researchers analyzed more than 1,700 firms from the Compustat database that had positive research and development investment from 1985 to 2005. They found that a public firm’s inclusion in EDGAR leads to an 11% decrease in innovation investment. Patents, sales and market share of firms consequently also significantly decrease.

For companies in the U.S. and abroad, the results demonstrate the real effects platforms like EDGAR can have, particularly as technology developments intensify and impact the information environment in which companies operate.

“The results are timely, as there is a growing regulatory interest in expanding U.S. reporting mandates to private firms,” Dambra explains. “Our findings are particularly relevant to the European Union, which recently agreed to create a single access point for all financial and sustainability reports from EU member firms.”

Dambra collaborated on the study with Atanas Mihov, associate professor of finance and a capitol federal fellow at the University of Kansas School of Business, and Leandro Sanz, assistant professor of finance at University of Notre Dame Mendoza College of Business.