The Paradox of Innovation Nondisclosure: Evidence from Licensing Contracts

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 US 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 nondisclosure signals more valuable IP. Our results suggest that credible nondisclosure partially resolves information frictions for innovative public firms when facilitated by sophisticated investors. (JEL D22, D82, G38, L24, O32, O34)

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