Corporate Innovation Strategy and Narrative Disclosures

Abstract

In this thesis, I examine how firms with different prioritizations of innovation strategy utilize narrative disclosures in their 10-K filings to communicate information about their innovation activities. I hypothesize and find that firms with a greater focus on exploratory innovations (versus exploitative innovations) disclose less narrative innovation information based on a cost-benefit tradeoff. Conducting a content analysis of the quality of narrative innovation disclosures, I find that exploration-focused firms tend to disclose fewer details but use a more positive tone in their disclosures compared to exploitation-focused firms. The tendency for exploration-focused firms to employ a more positive tone in narrative disclosures may be due to managerial overconfidence rather than management opportunism or firm performance. I also find that product market competition and technology spillover have opposite effects on narrative innovation disclosures due to their different proprietary cost implications. The negative relation between exploration-focused firms and narrative innovation disclosures is more pronounced when product market competition intensifies, while it becomes less pronounced when technology spillover becomes more prominent. Finally, I find that narrative innovation disclosures enhance investors’ understanding of innovative activities and reduce misvaluation and future stock price crash risk for exploration-focused firms. My thesis contributes to the disclosure and innovation literature with insights into how firms’ innovation strategies affect their narrative innovation disclosure decisions, which helps investors better evaluate corporate innovation strategy.