Disclosure of Innovation Activities by High-Technology Firms

This study investigates management incentive to disclose non-GAAP indicators concerning innovation in high-technology industries and the usefulness of the disclosure. As predicted, we find that firms increase disclosures of innovation when current earnings are less informative, or when future earnings are more uncertain. This finding is consistent with firms increasing disclosure in response to investor information demands when accounting data are less useful in assessing firm value. We also find that disclosures of innovation contain price-sensitive news. In addition, we find that disclosures of innovation are positively associated with the firm's future sales growth, profitability, and stock returns, after controlling for current performance and other factors known to influence future performance. This evidence is consistent with management disclosure conveying value-relevant information that is not reflected in current performance, but is predictive of future performance