Too much of a good thing? Mandatory risk disclosure and corporate innovation

• Mandating disclosure shifts investment from risky (e.g. innovation) to less risky investments (e.g. capital expenditures). • Uses unique setting of disclosure: Risk disclosures, particularly about innovation, tend to be asymmetrically negative. • Identified through both a mandate to add risk disclosure and removal of the mandate for smaller reporting companies. • Supports arguments of firms that mandating more disclosure may have unintended negative consequences. Using textual analysis of 10-K filings, we find that the Securities and Exchange Commission (SEC) mandate for risk disclosure has a negative effect on the inputs and outputs of corporate innovation, a proxy for risky corporate activity, with no corresponding decrease in capital expenditures. Moreover, firms’ innovation shifts towards less risky exploitative patents and away from more risky exploratory patents. Further analysis identifies financial constraints as a potential channel for the negative impact of mandatory risk disclosure on innovation. We address endogeneity concerns through a regression discontinuity design (RDD) which shows that removing mandatory risk disclosure has a positive impact on firm innovation for smaller reporting companies. These results are consistent with theoretical predictions that mandating increased disclosure can have unintended consequences for firms making risky investments, such as innovation.