The Disclosure of Good versus Bad News: Evidence from the Biotech Industry

Abstract

This paper examines how the type of news affects firms’ voluntary disclosures. We exploit hand-collected product-level disclosures made by publicly-traded biotech firms, which provide evidence of drugs’ progression through key regulatory milestones towards marketability. Of note, the disclosures allow us to distinguish firms’ treatment of good news (i.e., when drugs progress towards marketability) versus bad news (i.e., when drugs are abandoned). We first document that firms increase disclosures following good news (e.g., consistent with incentives to maximize shareholder value), as well as following bad news (e.g., consistent with minimizing shareholder litigation costs). Critically, we then document that the increase in disclosure for good news is higher relative to that for bad news, suggesting that firms view the net benefits associated with disclosure of good news as stronger relative to those for bad news. These results are consistent across product-level regressions, firm-level specifications, and other robustness tests.