Voluntary Disclosure of Externally Sourced Technological Innovation and Managerial Opportunism: Evidence from the Korean Stock Market

• Published date: 01 February 2018
• Author: Jin Hwon Lee,Kyung Soon Kim,Yun Woo Park
• DOI: http://doi.org/10.1111/ajfs.12207
• Date: 01 February 2018

Voluntary Disclosure of Externally Sourced

Technological Innovation and Managerial

Opportunism: Evidence from the Korean

Stock Market*

Kyung Soon Kim

College of Business Administration, Chosun University, Republic of Korea

Jin Hwon Lee

Business Management, Osan University, Republic of Korea

Yun Woo Park**

College of Business and Economics, Chung-Ang University, Republic of Korea

Received 5 January 2017; Accepted 24 August 2017

Abstract

This study aims to investigate the information effect of voluntary disclosure of externally

sourced technological innovation by type of technological innovation, namely, in-bound tech-

nology transfer, out-bound technology transfer, and technological alliance. Long-term perfor-

mance is lower for firms with lower quality accounting information and this effect is most

evident in the disclosure of an in-bound technology transfer. Further, low disclosure quality

firms undergo a greater decline in long-term performance after a seasoned equity offering fol-

lowing the disclosure of an in-bound technology transfer than high disclosure quality firms.

This relationship is more pronounced during a bear market than during a bull market.

Keywords Managerial opportunism; Accruals quality; Disclosure of externally sourced tech-

nological innovation; Seasoned equity offering; Long-term performance

JEL Classification: D80, G10, L20, M40

1. Introduction

Technological innovation can be divided into internally sourced technological inno-

vation and externally sourced technological innovation. In internally sourced tech-

nological innovation a newly patented technology or innovative production process

*This study was supported by research funds from Chosun University.

**Corresponding author: College of Business and Economics, Chung-Ang University, 84

Heukseok-ro, Dongjak-gu, Seoul 06974, Korea. Tel: +82-2-820-5793, Fax: +82-2-815-7001,

email: yunwpark@cau.ac.kr.

Asia-Pacific Journal of Financial Studies (2018) 47, 81–106 doi:10.1111/ajfs.12207

©2018 Korean Securities Association 81

is acquired through in-house research and development (R&D). In contrast, in

externally sourced technological innovation, a firm buys technology from another

firm (in-bound technology transfer), a firm sells technology to another firm (out-

bound technology transfer), or a firm licenses technology from another firm and

enters into a cooperative relationship for a period of time (technological alliance).

Generally speaking, as internally sourced technological innovation carries significant

risk, the risk in disclosing it is likely to be high. As a result, firms tend to avoid dis-

closing information on internally sourced technological innovation to outsiders

(Bhattacharya and Ritter, 1983; Holmstrom, 1989). On the other hand, as externally

sourced technological innovation is relatively less uncertain, firms may be more

motivated to disclose information on technological innovation to the capital mar-

ket, all else held constant.

In Korea, firms engaged in externally sourced technological innovation have

been disclosing, on a voluntary basis, information such as type of technological

innovation, its content, and the collaborating firm. We focus on investigating the

short- and long-term market responses, as well as determinants of the market

response, to a voluntary disclosure of externally sourced technological innovation

(in-bound technology transfer, out-bound technology transfer, and technological

alliance). Therefore, our investigation on the information effect of the disclosure of

technological innovation is confined to externally sourced technological innovation.

The objective of this research is to investigate whether voluntary disclosure of

technological innovation lessens information asymmetry between the firm and

investors, providing a positive signal on firm value to the market, or if it is oppor-

tunistic behavior to promote managerial self-interest. Unlike compulsory disclosure,

which is mandated by regulators, voluntary disclosure is a disclosure which the

manager of the firm undertakes only when he or she finds it advantageous to do

so. Potentially, voluntary disclosure has a positive effect of restoring the market val-

uation of the firm to its intrinsic value by reducing information asymmetry in the

market. However, a rent-seeking manager has an incentive to misuse voluntary dis-

closure by inflating information or providing false information to mislead investors.

The disclosure of externally sourced technological innovation in Korea is volun-

tary. Generally speaking, voluntary R&D disclosure (i.e., disclosure on internally

sourced technological innovation) is aimed at achieving specific goals, namely,

reducing the cost of capital, reducing agency costs arising from conflicts of interest,

and reducing the risk of a negative transfer of wealth. Verrecchia (2001) sees discre-

tionary disclosure as a substitute for regulation and an attempt to mitigate informa-

tion asymmetry. However, as the disclosure of information on R&D may provide

sensitive information to competing firms, causing a disclosing firm to incur high

proprietary costs of disclosure, not all firms would provide information on R&D

(Verrecchia, 1983; Dye, 1985; Jones, 2007). Therefore, disclosure will prevail only if

disclosure costs are sufficiently low, or if information asymmetry is sufficiently high.

Jones (2007) finds that higher proprietary costs are associated with lower levels of

disclosure about R&D activities.

K. S. Kim et al.

82 ©2018 Korean Securities Association