James combines financial, strategy expertise
to examine corporate research disclosures

As a strategy scholar and former equity investment manager, Sharon D. James has an interesting perspective on a company’s incentives to disclose the details of research and development (R&D) projects.

James, an assistant professor of management and human resources, connects her corporate and academic backgrounds to investigate the risk and rewards associated with publicizing projects that companies have on their drawing board.

The research topic is the focus of her dissertation, which shared second place honors at the 2005 INFORMS/Organization Science dissertation proposal competition. James researched hundreds of pharmaceutical and communication equipment companies for the study.

She talked with Knowledge Link about this interesting balance companies must strike in order to raise capital for project development as they attempt to hold onto valuable trade secrets.

KL: How did you approach this study based on your professional and scholarly backgrounds?

James: Based on my industry work experience, I attempted to understand the interaction of the economic story about financing with the strategy story about how firms achieve and sustain a competitive advantage. I examined what influences firms’ access to capital markets or what will restrict companies to internal cash flow as a source of investment funds. The initial motivation for my study was to understand the conditions under which some firms self-constrain their access to capital markets. On the strategy side, I examined how strategic interaction in competitive markets affects firms’ abilities to achieve a sustainable competitive advantage and outperform their rivals.

KL: What kind of R&D situations did you examine?

James: I focused on R&D projects that create product innovations. The key strategic issue in my study is whether voluntary disclosure makes it easy to imitate or copy firms’ R&D efforts. This is what reduces returns to innovation and firm performance ultimately.

KL: When are corporations the most likely to risk disclosure and how much do they reveal?

James: Certainly when they are raising capital. The SEC requires firms to file a prospectus before issuing new securities in capital markets. After a specified period, management hosts a road show for investors where they explain how the funds will be used and the expected timing of returns to investment. Other instances of disclosure are voluntary and often strategic in that management attempts to signal to rivals that the focal firm has a technological lead or to convince investors that it has value-enhancing projects.

KL: How can firms minimize the risk that competitors will imitate them?

James: This is a signaling story where firms attempt to send positive signals to investors without revealing everything because information becomes a public good once it is released. The part of the story that is less understood is the strategic implications of disclosure. As an investor I don’t want management tipping their hand too soon and reducing the upside by disclosing information that helps rivals to develop competing technologies. Firms must weigh the benefits and costs to determine the appropriate disclosure strategy. Ideally, management would like to disclose just enough information to convince investors that R&D projects will provide the returns they require.

KL: To what extent will corporations circumvent disclosing trade secrets?

James: Some firms will intentionally bear high financing costs to avoid disclosure. That does not mean that they cannot go to the market, but they choose to avoid revealing information that helps competitors to imitate their technologies. Other firms will disclose even if they have low financing costs for strategic reasons such as broadcasting their new technologies to potential trading partners. For example, firms that focus on bio-tech discoveries may want to sell marketing rights and license their technologies to large pharmaceutical firms.

KL: Do companies disclose to hinder the competition?

James: My strategic disclosure theory argues that some firms may disclose to discourage new entrants into a technology area. They hope that weaker firms will not enter or discontinue investment because the disclosing firms have a strong technological lead and convince weaker firms to conclude that their returns will be too low to warrant competing with stronger firms.

KL: What type of announcements did you examine to determine if a disclosure had been made?

James: I examined corporate press releases which are easy to get, but are very time consuming to collect and analyze. The data set contains more than 80,000 articles. To minimize bias in the dependent variable R&D disclosures, I collected all press releases issued by firms in the communications equipment and pharmaceutical manufacturing industries over a 15 year period.

KL: Why did you choose press releases rather than annual reports for your data set?

James: Investors cannot wait for an annual report to be released because by the time it is printed the information has been traded on a many times. The phenomenon I study requires real-time information with a discrete disclosure date which firms tend to reveal through corporate press releases.