Innovation and annual report readability

Abstract

We explore the relationship between innovation and annual report readability using multiple innovation metrics. While lower readability can boost innovation, an inverted U-shaped link with patents suggests that excessive opacity becomes counterproductive. We identify two underlying mechanisms—preserving competitive advantages and concealing risks. Consistent with the first mechanism, the innovation-readability link is stronger in competitive markets, where firms reduce transparency to better protect themselves from competitors. In line with the second mechanism, the innovation-readability link is stronger for riskier firms. Overall, our findings support the idea that firms strategically tailor their disclosure to match their innovation needs. • Finds an inverted U-shaped link between low readability and innovation performance • Complex annual reports can boost innovation, but too much opacity hinders it • Strategic obfuscation helps firms protect innovation in competitive environments • R&D firms benefit most from balancing clarity and strategic obfuscation

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