Every form of disclosure carries strategic consequences for an innovating firm. Patents grant temporary legal exclusivity in exchange for public disclosure. Trade secrets conceal the innovation but offer no legal recourse if rivals uncover it. Mandatory financial filings inform investors and regulators but can also reveal an innovation’s economic value to competitors. These channels are substitutes: when access to one becomes cheaper, firms shift toward the others. A study by researchers in the Department of Finance at National Taiwan University examines how firms rebalance these choices when one channel suddenly becomes much more accessible.
The study uses the U.S. Securities and Exchange Commission’s introduction of the Electronic Data Gathering, Analysis, and Retrieval system (EDGAR) in the early 1990s, which made public firms’ mandatory filings freely available online. Before EDGAR, reading these filings required visiting one of three SEC reference rooms or paying for costly data feeds. The SEC phased firms into EDGAR in randomly assigned waves between 1993 and 1996, allowing comparison of innovation choices before and after each firm’s inclusion.
After joining EDGAR, firms reduce their patent filings by 10.6% on average. Figure 1 plots this effect by quarter, showing the drop emerges only after EDGAR inclusion. Meanwhile, inventor retention rises by 37.7%, a shift that captures greater reliance on trade secrecy, since departing inventors can carry confidential knowledge to rivals. The effects are strongest in highly competitive industries and at firms with lower costs of capital. Importantly, firms do not change their underlying research and development spending; only how they protect the resulting innovations.
The findings highlight an underappreciated trade-off: free and equal access to financial information helps investors evaluate firms fairly, but the same filings can also expose a firm’s most valuable innovations to imitation. The same logic likely extends to more recent shifts, such as the SEC’s 2013 guidance permitting firms to make material announcements through social media, which similarly lowers the cost of accessing corporate information. Policymakers who promote broader disclosure access should therefore weigh not only the benefits to investors and market fairness, but also the parallel cost of slowing innovation diffusion, which has long been viewed as a key engine of economic growth.
Dynamics of the Treatment Effect: Patents
Presentation at the AsianFA Conference
