More Light but Less Sight? The Dual Effect of Information Transparency on Firm Innovation

Whether more information available in capital markets fosters or hinders corporate innovation—and ultimately long-term firm value—remains a contentious question. Does enhanced transparency discipline managerial decision-making, or does it induce short-termism? This study addresses this tension by proposing that firms’ R&D capabilities critically moderate these opposing effects. Leveraging the European Union’s mandate for quarterly reporting as a quasi-natural experiment, we employ a difference-in-differences design to a panel of EU-listed manufacturing firms. We uncover a dual pathway: For firms with weaker R&D capabilities, greater transparency exerts a disciplining effect, leading to reduced R&D investment and enhancing firms’ value. Conversely, firms with stronger capabilities reallocate R&D toward more familiar domains to deliver quicker returns, consistent with a myopic response that limits exploration and undermines long-term value. Our findings contribute to management theory by unpacking how capital market pressures differentially affect the “whether” and “where” of innovation decisions and offer policymakers important insights into the unintended consequences of disclosure regulation.