Mandatory Innovation Disclosure Increases Crash Risk: Evidence from the American Inventor’s Protection Act

Abstract

Employing the American Inventor’s Protection Act (AIPA) that mandates, all patent applications are to be published within 18 months after filing, as a quasi-natural experiment, we find that accelerated patent disclosure increases stock price crash risk. This effect is stronger when treated firms are technologically closer to their rival firms and more concerned about proprietary costs. Further analysis indicates that, following the AIPA, managers shift towards less timely and fewer bad news disclosures. Overall, we document that regulatory mandates of earlier disclosure of patents induce managers to strategically withhold negative information unrelated to patents, leading to increased crash risk in the stock market.