Do voluntary disclosures aid innovation?

We examine whether voluntary disclosures help firm’s innovative activities by reducing information asymmetry, and short-termism in managers. Using Reg FD as a natural experiment with a difference-in-difference design, we find that firms that provide higher voluntary disclosures in the form of earnings guidance exhibit greater number of future patents and citations. Further analysis using Heckman two-stage procedure to control for unobservable correlated omitted variables yields similar results. We hypothesize that voluntary disclosures help innovation by reducing information asymmetry, and short-termism of managers. Supporting this hypothesis, we find that for firms with higher analyst following which are prone to exert excess pressure on mangers to meet short-term goals, voluntary disclosures help enhance innovation. Similarly, for firms with higher probability of take-over, we find that voluntary disclosures provide a supportive environment for innovation. Overall, our findings suggest that voluntary disclosures alleviate managerial myopia and help support innovation.