Qiwu Guo

Project description

This study investigates the correlation between textual innovation disclosure in the MD&A (Management Discussion & Analysis) section and stock return on the Chinese market from 2001 to 2020. We employ an exclusive database to quantify textual innovation disclosure. By comparing R&D investment to patents, we investigate the validity of this measurement and conclude that it can reveal innovation-related data that is not only reflected in the quantitative statistics but also independent information in the qualitative texture.

There are four key discoveries. First, the market does not respond to enterprises' innovation disclosure in the short run. Second, over the long term, the disclosure of innovations might indeed imply innovative actions of firms, which can result in favourable stock returns. Third, innovation disclosure can fuel the firm's net income growth and earnings before interest and taxes (EBIT) growth, thereby enhancing the stock's long-term return. Fourth, regarding the heterogeneity of firms, innovation disclosure is more prevalent among small enterprises, firms with greater financial constraints, firms with worse corporate governance, and firms with more political connection, such as state-owned enterprises (SOE) or receive more government subsidies. This demonstrates that for a company with a greater degree of information asymmetries, a positive disclosure of innovation information can more effectively erase market knowledge asymmetries, hence increasing stock returns