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Does Mandatory Risk Disclosure Harm Corporate Innovation?
There is a debate over whether mandating more risk disclosure will positively or negatively affect corporate innovation. On one hand, information is the lifeblood of capital markets and disclosing more should reduce information asymmetry, which in turn reduces firms’ cost of capital. A lower cost of capital will allow firms to raise more capital for […]
Shiu-Yik Au is an Associate Professor of Finance at University of Manitoba, and Hongping Tan is a Professor of Accounting at McGill University. This post is based on their recent article forthcoming in the Journal of Accounting and Public Policy.
There is a debate over whether mandating more risk disclosure will positively or negatively affect corporate innovation. On one hand, information is the lifeblood of capital markets and disclosing more should reduce information asymmetry, which in turn reduces firms’ cost of capital. A lower cost of capital will allow firms to raise more capital for investment in innovation activities.
On the other hand, mandating more risk disclosure may harm investment in R&D as firms are forced to disclose the risks of innovation, but have difficulty disclosing the benefits of innovation. For example, in the current race for Artificial Intelligence (AI), the risks are already largely known (e.g. if the system fails the money invested in AI would be wasted) while the benefits are hard to quantify (e.g. the extent of potential improvement in productivity of office workers). An additional issue is that more disclosure may make less risky projects, such as exploratory patents or capital expenditures, more attractive. For example, why should we invest in firm A’s early-stage cure for cancer when firm B’s weight loss drug has a proven market for billions?
