Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention...
Transcript of Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention...
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 1/40
Corporate Disclosure of Competitive Advantages:
Why firms direct attention toward their
breakthroughs*
Russell W. Coff Goizueta Business School
Emory University1300 Clifton Rd.
Atlanta, Georgia 30322Phone: (404) 727-0526FAX: (404) 727-6313
Email: [email protected]
Peggy M. Lee W.P. Carey School of Business
Arizona State UniversityPO Box 874006
Tempe, Arizona 85287-4006Phone: (480) 965-8041FAX: (480) 965-8314
Email: [email protected]
Scott Hayward Goizueta Business SchoolEmory University1300 Clifton Rd.
Atlanta, Georgia 30322Phone: (404) 727-3642FAX: (404) 727-6313
Email: [email protected]
January, 2008
* We wish to especially thank Gary Dushnitsky, Bob Hoskisson, Sharon James-Wade, and JimWestphal for their insightful comments and suggestions.
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 2/40
Corporate Disclosure of Competitive Advantages:
Why firms direct attention toward their
breakthroughs
Abstract
Despite the value of secrecy in extending a competitive advantage and protectingintellectual property, some firms actively direct attention toward their capabilities.This may stimulate rivals’ efforts to erode the advantage. We develop theoryabout when firms may disclose information about technological breakthroughs.Using a sample of over 2400 breakthrough patents, we examine the timing of disclosures about firm capabilities. Findings suggest three forces that drive suchdecisions: 1) the need for complementary resources, 2) the need to garnerattention in order to fully exploit the advantage, and 3) managerial opportunismwhereby managers stand to gain personally by controlling the timing of keyinformation releases. This augments extant theory of how advantages emerge byhighlighting circumstances under which firms may inadvertently alert their rivals.
Key words: attention-based view, competitive advantage, secrecy, insider trading
2
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 3/40
“Firms must collect information about the competitive context within which theyare operating in order to anticipate the profit implications of their strategicchoices” - Makadok and Barney (2001: 1621)
Theories of competitive advantage tend to rely, in varying degrees, on assumptions about the
distribution of information among competitors. As the above quotation suggests, strategic
decisions are information-intensive, requiring data about the industry, competitors, and future
prospects. Thus, keeping information from rivals is often a key strategic task. Guarding
information about capabilities like successful R&D programs may extend a firm’s advantage if it
prevents rivals from knowing what to imitate or how to develop substitutes for its capabilities
(Barney, 1991). Conversely, revealing such information may attract rivals’ attention and spur
efforts to erode that advantage (Bhattacharya & Ritter, 1983). Secrecy, the active maintenance of
information asymmetries between firm insiders and firm outsiders, may give the firm time to
establish a dominant position and appropriate returns from an innovation (McEvily &
Chakravarthy, 2002). Cohen, Nelson and Walsh (2000) found that firms increasingly rely on
secrecy and lead-time advantages to stay ahead of rivals. As such, voluntary disclosures of
strategic information may come at a substantial cost.
Despite the clear advantages of keeping corporate secrets, managers sometimes actively
direct attention toward their strategic capabilities. For example, according to the data collected in
this study, about 30% of breakthrough patents are mentioned in press releases or news stories in
trade journals and other publications. Given the importance of strategic information, it is critical
to integrate theory about competitive advantages with an understanding of information flows that
may lead to their erosion. We therefore explore when and why firms make disclosures that may
direct rivals’ attention to their valuable capabilities. While these questions are central to strategic
management, there is relatively little theory or empirical work in the area.
3
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 4/40
We address this gap theoretically by exploring the decision to direct attention toward a
strategic capability through several distinct lenses. We begin by examining how rivals’ routines
and bounded rationality (Cho & Hambrick, 2006; Ocasio, 1997; Simon, 1976) may allow firms
to effectively keep their technological breakthroughs secret, even after applying for patents. We
then use the resources and capabilities literature to identify strategic reasons why firms may
intentionally draw attention to their strategic assets to maximize rent generation. Finally, we
explore why managers might direct attention toward such assets opportunistically in order to
maximize their private gains (Ahuja, Coff, & Lee, 2005; Coff & Lee, 2003). In doing so, we rely
extensively on the concept of information asymmetry between firms and their rivals, between
firms and their potential alliance partners, and between firm insiders and their shareholders.
Analyzing a sample of over 2,400 breakthrough patents, we identify three broad motives for
directing external attention toward technological breakthroughs: 1) the firm must announce the
technological asset to obtain resources, 2) disclosing the asset enhances its economic value by
making it easier to exploit, and 3) managers seek personal gains through releasing strategic
information about the firm’s strategic assets. Thus, in some cases, the disclosures may enhance
shareholder wealth (Diamond, 1985) while in others, they may tend to make the competitive
advantage less durable or sustainable.
An Attention-based View of Disclosure
Before exploring the motives for public disclosures about patented technologies, it is useful
to examine the strategic importance of such information. To what extent is it important for firms
to guard information about which of their patents are especially valuable? This goes beyond the
minimum disclosure required in the patent application process.
4
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 5/40
The most important strategic decisions are typically made under conditions of risk and
uncertainty (Andrews, 1987; Bettis & Prahalad, 1995). Indeed, if this was not the case, the
“correct” alternative would be obvious and these decisions would not warrant much time or
effort – they would not be strategic. In practice, such decisions require substantial investments in
information and analysis about forthcoming events that influence the value of a given strategy
(Amit, Domowitz, & Fershtman, 1988; Makadok & Barney, 2001; Zajac & Bazerman, 1991).
Strategic information may be costly to acquire but perhaps more importantly, given cognitive
limitations, managers may not know how or where to search for critical information.
Consequently, organizations tend to follow boundedly rational and satisficing routines (Cyert &
March, 1963 [1992]). For example, managers often search for information and solutions in
familiar territory because they cannot easily comprehend or observe the broader environment
(Ethiraj & Levinthal, 2004; Rosenkopf & Almeida, 2003; Stuart & Podolny, 1996). Once
acquired, the strategic information may be ambiguous and subject to interpretation by decision-
makers. As such, both the search process and the interpretation of information is shaped by
individuals’ perceptions and organizational factors such as the composition of the executive team
(Cho & Hambrick, 2006; Corner, Kinicki, & Keats, 1994). Accordingly, executive teams may
arrive at different conclusions when drawing on the same information depending, for example,
on how they label threats and opportunities (Dutton & Jackson, 1987).
Information asymmetries persist even when formal barriers to information do not. Managers
may miss essential information or, even if information is considered, managers may or may not
interpret it as requiring action. This can be critical as firms formulate strategy in a competitive
context where competitive intelligence about their rivals is a central input to their process. The
5
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 6/40
imperfect nature of this information and how it is interpreted may, in turn, influences what
strategies are undertaken in response (Chen, 1996).
Past studies on voluntary disclosure address the double-edged nature of revealing
information. Information asymmetries with investors can lead to greater investor uncertainty,
increasing the firm’s costs of capital. Information asymmetries with competitors, however, can
lead to greater competitive ambiguity and reduce the firm’s threats from imitation and
substitution. Thus, any information that managers voluntarily disclose, perhaps in hopes of
lowering their cost of capital, may direct attention in ways that help rivals evaluate their strategic
alternatives. For instance, Ethiraj and Zhu (2006) found that, when pharmaceutical firms leaked
information about drugs, it influences imitators’ chances of success. Firms have discretion over
the timing and amount of information they make public. Understanding the timing of disclosures
reveals information about the relative costs and benefits a firm expects from information
asymmetries over the course of acquiring and developing strategic assets.
Patents, Attention and Competitive Intelligence
Given our empirical context, we must ask whether information asymmetries are relevant in
the context of patents. To some extent, filing for a patent indicates a decision to forgo some of
the advantages of secrecy. In filing for patent protection, firms and individual inventors identify
and codify the innovation in exchange for the right to exclude others from use of that intellectual
property (Liebeskind, 1997; Teece, 1986). The innovation becomes part of the public record and,
since 2001, patent applications have been searchable online even before they are granted.
Nevertheless, patenting is not the antithesis of secrecy; it may not offer a sufficiently reliable
signal to impel rivals to take action. One indicator of patent value is subsequent citations
(Harhoff, Narin, Scherer, & Vopel, 1999; Podolny & Stuart, 1995; Trajtenberg, 1990). While
6
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 7/40
most patents receive few citations, they still compete for rivals’ attention since a lack of citations
is not a meaningful signal until many years after a patent has been granted. In this way, patents
may receive little attention from other innovators despite their public disclosure unless they are
accompanied by additional signals of their merit.
In order to understand how relevant patents can go unnoticed, we need only look at the
volume of patent activity. In 2005, there were 417,508 patents filed with the United States Patent
and Trademark Office (USPTO), and 157,718 patents issued.1
While patent examiners require
innovations to meet some degree of novelty and utility, the patent office’s ability to discern good
and bad patents is increasingly being questioned. Often, patent examiners give the inventor the
benefit of the doubt, allowing the patent courts to settle any disputes that might arise (Lemley,
2001). Thus, a granted patent offers only a limited initial signal of an innovation’s potential
value. Given the large number of patents of dubious quality being granted each year, firms and
inventors tend to rely on search routines to monitor external patent activity. These search
routines are inevitably subject to critical blind-spots.
Even when a patent is scrutinized, its usefulness may not be immediately obvious. Innovation
is inherently uncertain, and despite its mandate, the patenting process can introduce as much
uncertainty as it mitigates. First, like all innovations, the ultimate impact of a patent may take
years to become obvious, requiring refinement of the focal innovation, development of
complementary innovations, and/or particular economic or social circumstances before the
innovation’s full potential becomes clear. Second, firms sometimes manage the patent
application process to control how and when critical information is revealed publicly (Graham,
1997). The most important uses for a technology can be withheld initially and added later as a
1U.S. Patent and Trademark Office (2007) U.S. Patent Statistics: Calendar Years 1963-2006(http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.pdf )
7
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 8/40
continuation application – especially if the firm is willing to forego its rights to patent the
innovation internationally. As such, key patent claims may not even appear in the patent until
well after its initial application. Finally, understanding the utility of a patent may require seeing
the patent as part of a larger “thicket” – a group of patents designed to protect a given intellectual
property position (Hussinger, 2006). In these cases, patenting firms construct patent claims such
that a group of patents need to be examined to understand the nature of the protection afforded.
In other words, examining the claims on any one patent may not alert rivals about the strategic
importance of the broader thicket.
Thus, even with public patents, information asymmetry remains between what is known by
the inventor and what is seen and understood by others. We should expect managers and
inventors to monitor patents. However, they do so in a manner that acknowledges this
information asymmetry and their limits to see and understand all the information available to
them. That is, inventors engage in “local search” (Levinthal & March, 1993) by monitoring the
technological categories on which they are currently working. Furthermore, competition provides
obvious incentives for inventors to monitor rivals. Focusing on immediate technologies and the
immediate industry is due to both salience and the monitoring firm’s absorptive capacity – these
patents are easier to understand and assimilate (Cohen & Levinthal, 1990). Similarly, firms
follow the innovation activities of suppliers and customers (Lilien, Morrison, Searls, Sonnack, &
von Hippel, 2002). Finally, there are some firms – Microsoft, Intel, and IBM for example –
whose media attention, reputation, or status generally command the attention of inventors and
attract subsequent technological development2
(Podolny & Stuart, 1995). Still, while monitoring
2Interestingly, Podolny and Stuart (1995) note that technologies sponsored by high-status actors are more likelyto be rapidly developed than are competing ones, and they will thus appear as superior ex post despite the fact thatthey may not have been superior ex ante. This raises the question of whether patent citations indicate value becauseof the technology or because of the subsequent building on the technology.
8
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 9/40
local patents and the patents of salient firms may be necessary and efficient, some firms and their
patents will still escape the attention of others.
Given that many firms innovate to move into new industries, (Burgelman & Sayles, 1986)
and that radical new technologies often come from new entrants, gaps in patent monitoring and
decisions to patent quietly have potentially radical effects (Tushman & Anderson, 1986). For
example, Bessen and Meurer (2008) write about E-Data which was granted a patent to protect its
technology for a kiosk that produced digital audio tapes. However, this patent’s application to e-
commerce ultimately blocked IBM from exploiting its own library of e-commerce patents unless
they paid licensing fees to E-Data. Similarly, despite owning many patents for its mobile
communication technologies, Research in Motion (RIM) was forced to pay more than $500
million to NTP – a patent licensing company. Local searches in their own industries probably
would not have surfaced these competitive threats for IBM or RIM.
The implication of patent uncertainty and local monitoring is that a firm’s decision to patent
an innovation is not the final strategic decision the firm will face regarding the patent’s public
disclosure. For some large, high-status firms or industry incumbents, patenting equates to full
public disclosure: given their salience, their patent activity is impossible to keep quiet. For other
firms, however, the decision to patent may be followed by a decision of whether or not they
should do more to compete for the attention of others. Conversely, they may choose to remain
nonchalant as long as possible.
Directing Attention to Exploit an Opportunity
Empirically, studies show that subsequent patent citations are correlated with valuations by
inventors and their contribution to firm market value (Harhoff et al., 1999; Trajtenberg, 1990).
Some firms have even begun monitoring subsequent citations as an indication of the productivity
9
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 10/40
and importance of its R&D efforts and laboratories (Barker, 2002). Thus, disclosure and
attention may actually increase the value of patents. Revealing the existence and nature of the
innovation not only attracts other inventors and increases the innovations technological impact, it
may also be critical to the firm’s ability to appropriate the benefits of the innovation.
Since Arrow (1962), we have understood the double-edged nature of disclosing information
about innovations and R&D efforts. According to Arrow, invention produces information, and
information can be replicated and transmitted almost without cost. Research results spill over
among firms once the inventor moves to appropriate benefits by marketing the information, or
even by using the information in the firm’s own products and processes. Disclosing information
to attract the attention of inventors, investors and partners also alerts imitators and competitors.
This creates an apparent trade-off between the benefits of patenting quietly and developing the
technology internally, and the benefits of attracting the attention of others.
When are firms likely to disclose information, thereby reducing the information asymmetry
between firm insiders and firm outsiders, about their strategic assets to others? One answer is
that disclosure helps firms maximize the value created from the innovation. This may be
especially the case if the firm must disclose the information to acquire complementary resources
or to gain market penetration. Below, we explore how a firm’s resource requirements and the
need to penetrate the market influence the timing of disclosures about the firm’s breakthrough
innovations.
Resource Needs
Smaller firms and those with new technologies face especially high hurdles in obtaining
needed resources to fully exploit an innovation. Investors rely on codified knowledge and
historical financial, economic, and market data which are typically unavailable for less
10
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 11/40
established firms. Absent information about the inherent quality and value of the firm or its
technology, investors may tend to shy away from risky business opportunities. These firms often
lack the resources or reputation to exploit a new innovation and venture capitalists tend to view
them as higher risk prospects (Sacks, 2002). Thus, many of these firms face the question, not of
how long their advantage will be sustained, but of whether they will survive to realize any gains
(Freeman, Carroll, & Hannan, 1983; Singh, Tucker, & House, 1986).
Firm size is an important indicator of survival in that larger, more established firms will
usually have access to slack resources that put it in a better position to weather change and buffer
exposure to risk (Sharfman, Wolf, Chase, & Tansik, 1988; Singh, 1986). In contrast, smaller
firms may be especially vulnerable to competition and environmental shocks (Carroll & Hannan,
2000). Resource owners tend to require more rigorous evidence that the firm is stable and
capable of realizing the benefits of its technological advantages. Hence,
H1a: Disclosure of breakthrough patents occurs earlier for smaller firms than it
does for larger firms.
For firms dependent on markets and external investors to raise funds, disclosure provides
specific advantages. When facing risk and uncertainty, investors charge a premium for their
investments. Consequently, those seeking investments disclose information about their strategic
assets to help reduce uncertainty thereby reducing the firm’s cost of capital (Amit, Glosten, &
Muller, 1990; Lerner, 1994). Thus, the resource needs of the firm become a critical factor in
managerial decisions about when to disclose information about their R&D.
Even for firms seeking venture capital backing where disclosures tend to be more private in
nature (Amit et al., 1990; Yli-Renko, Autio, & Sapienza, 2001) – once information leaves the
organization it is, to some extent, public. For example, one of the drivers of corporate venture
capital is that it allows firms to gain access to knowledge from the firms they fund (Dushnitsky
11
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 12/40
& Lenox, 2005a, b). Arrow (1962) observes that the replicable and transferable nature of
information means that the information is not likely to stay private. Even under non-disclosure
agreements and with patent protection, the knowledge in some form can be spread and used
indirectly or as a guidepost for the research efforts of others (Arrow, 1962). This is especially
true if the firm must make private disclosures to several venture capital firms in order to find one
willing to invest.
As described for smaller firms, firms seeking external capital may be effectively forced to
release information about the existence and characteristics of their innovation to realize even a
part of the potential gains. Survival and the stability, rather than maximizing profits, may be a
primary concern to managers. Furthermore, while firms may have sufficient financial resources
to cover initial research expenditures, the most significant capital needs often occur in the later
development stages and as production is scaled up for commercialization. Developing the
technology, in terms of implementation, production, promotion, and education, is expensive
(Brown, 1990; Greene & Brown, 1997). Firms without the necessary capital to guide their
innovation through the later stages of development and marketing may need to disclose
information about the technology earlier. Accordingly:
H1b: Disclosure of breakthrough patents occurs earlier for firms seeking funds from
capital markets or joint ventures.
Firms differ in the degree to which they focus on innovation as their core strategy, and
allocate limited resources to innovation. Innovative firms may be leaders in R&D, but this
position raises some issues. First, R&D is both uncertain and costly. As firms allocate resources
toward innovation, they tend to increase their reliance on equity rather than debt, and disclosure
becomes increasingly necessary (Aghion, Bond, Klemm, & Marinescu, 2004). Aghion et al.
(2004) explained how R&D-intensive firms may prefer debt – as it allows for greater control
12
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 13/40
over innovation appropriations within the firm. Nonetheless, as firms allocate an increasing
share of their resources to research, they have no choice but to seek public financing as their
resource needs outruns the constraints of private investors.
H1c: Disclosure of breakthrough patents occurs earlier for firms with higher R&D
intensity.
Market Exploitation
Similarly, innovative firms may lack the ability to develop and appropriate benefits from
their innovations. Innovation may be seen as the first step or merely one activity that includes the
development, manufacturing and marketing of a new product or process (Kline & Rosenberg,
1986). Firms without the capability to develop, manufacture, and market the innovation may
appropriate benefits from their innovation through licensing, or by acquiring critical
complementary capabilities through external partners. Thus, the capability needs of the firm are
also a critical factor in managerial disclosure decisions.
The timing of disclosures may be a reflection of the firm’s complementary capabilities. Firms
without manufacturing or marketing expertise may forgo the opportunity to develop those
capabilities internally, and instead seek partners who already have those capabilities. If such
complementary capabilities are not in place, it may take time to find and engage partners who
can help bring a new product to market. As such, announcements may be delayed until strategic
partners are in place. Thus:
H2a: Disclosure of breakthrough patents occurs later when firms lack necessary
capabilities to exploit a product market opportunity (e.g., supplier and
manufacturing joint ventures).
At times, the market for technology takes priority over the product market. Some firms may
choose not to develop and manufacture the innovation at all, instead selling their innovation
through licensing and cross-licensing (Arora, Fosfuri, & Gambardella, 2001). In other cases,
13
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 14/40
when seeking to establish a new technological standard, firms may need to direct attention
toward its technology. That is, when there is a winner-take-all standards war, only the winner
ultimately survives and thrives (Anderson & Tushman, 1990). Here, a firm may disclose detailed
information about an innovation to generate licensing revenue and to prevent rivals from seeking
substitute technologies (McEvily, Das, & McCabe, 2000). Should the innovation become an
industry standard, firms may actually increase profits by revealing information earlier, leading to
a long-run competitive advantage. Furthermore, when competitors adopt the standard, they help
to both build and legitimate the market so that customers are more comfortable adopting the
standard (Allen, 1983; De Fraja, 1993). That is, they may motivate suppliers to improve the
quality and availability of complementary products or increase efficiency (Allen, 1983; Harhoff,
Henkel, & von Hippel, 2003).
For example, Motorola and others managed the intellectual property regime for GSM
technology so that it emerged as a telecommunications standard (Bekkers, Duysters, &
Verspagen, 2002). In the process of designing that standard, it was important to avoid a situation
in which any intellectual property right holder could hinder or hold up the development of the
standard. Despite such efforts, the ultimate GSM standard includes significant intellectual
property rights without which GSM devices would be impossible.
Even when winner-take-all markets are not evident, garnering attention can enhance revenue.
Other firms may still wish to license the technology even if there are alternatives. For example,
the focal technology may be relatively more effective or alternative technologies may also need
to be licensed (e.g., multiple proprietary standards). In this context, if the focal firm seeks
licensing revenue, it may need to publicize the breakthrough to encourage others to license the
technology. Accordingly, firms will likely disclose information about technological assets
14
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 15/40
earlier in the process in order to increase the value of the innovation as perceived by potential
licensers and adopters. Thus:
H2b: Disclosure of breakthrough patents occurs earlier when firms seek to exploit a
technology market opportunity (e.g., licensing).
Firms may also exploit new capabilities to gain access to other firms’ technologies. In this
case, the breakthrough patent may serve as a trading tool rather than as a direct source of
licensing revenue. Nevertheless, the more valuable the technology, the more useful it will be in
securing access to other valuable technologies. For example, as Google contemplated entry into
the mobile communications operating systems market, it did not own patents to many of the
essential telecommunications innovations (Veverka, 2007). Google did, however, own many
other valuable patents that it could cross-license to telecommunications companies to gain access
to these protected technologies.
However, technology transfers of this sort differ from other ways of exploiting breakthroughs
in that they do not require a broad disclosure to the market. Rather, one would expect firms to
quietly approach specific partners who have desired capabilities and make private disclosures of
what they have to offer in exchange. In this sense, exploiting a breakthrough by initiating
technology transfer alliances should not lead to public disclosure of the focal firm’s capabilities.
H2c: Disclosure of breakthrough patents occurs later when firms seek to gain
through private trading of knowledge with select partners (e.g., technology
transfer alliances).
Directing Attention for Managerial Self-Interest
In some contexts, examining only the trade-off between resource needs and market
exploitation may be incomplete. The current conversation around public disclosures focuses on
an assumed analysis of the costs and benefits of disclosure to the firms. However, firms may
disclose breakthrough innovations for reasons that have little to do with resources needs or the
15
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 16/40
desire to fully exploit the innovation. Rather it may be motivated by a desire for some
stakeholders to reap gains – perhaps at the expense of other stakeholders (Coff, 1999). The
imperfect public market for information exists not only regarding the value of patents but also
regarding firms’ future prospects. Indeed, these two can be closely intertwined. Uncertainty
about the firm’s value and consequently information asymmetry between firm insiders and
shareholders may be especially amplified for firms with knowledge-based advantages because
this knowledge is difficult to assess and transfer, particularly across firm boundaries (Coff &
Lee, 2003; Kogut & Zander, 1992).
The very same information asymmetries and attention gaps we explored in previous sections
also drive many agency dilemmas (Jensen & Meckling, 1976; Riordan, 1984). For example,
where managers’ financial objectives differ from shareholders’, the timing and extent of
information release may represent agency problems. That is, managers may disclose information
to profit personally through insider trading rather than because it helps the firm to develop and
exploit the breakthrough. To the extent that insider trading drives the timing and nature of an
information release, it suggests that the motive may not be fully consistent with shareholder
interests. This is especially true to the extent that sacrificing secrecy shortens the duration of a
competitive advantage. Along these lines, Bushman and Indjejikian (1995) offer a model that
demonstrates how corporate insiders might use voluntary disclosures as a way to reap excess
trading profits with their superior information.
Consider, for example, that many employees have a substantial portion of their wealth tied to
the firm. If the innovation truly represents a major breakthrough, its value will eventually be
reflected in the firm’s stock price. However, employees who are heavily vested in the stock may
prefer to have that value reflected sooner rather than later. They may even be willing to sacrifice
16
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 17/40
some of the sustainability or duration of an advantage in exchange for realizing their personal
gains sooner. Therefore:
H3: Disclosure of breakthrough patents occurs earlier as insider purchases before
an announcement or insider sales after an announcement increase.
Methods
Sample and Data
The sample for this study includes all patents in the top-1% of citations in their respective
technological arena. The number of cites a patent receives is a commonly used indicator of its
importance and value (Harhoff et al., 2003; Harhoff et al., 1999; Trajtenberg, 1990). These
patents represent platforms for further innovations and may thus be associated with knowledge-
based competitive advantages. The sample population was further focused to include only
publicly traded companies. Publicly traded companies offer access to a variety of data
unavailable for private firms. For this study, the insider-trading data and information on equity
and debt sources of financing were essential to test the hypotheses.
Data were collected for all top patents applied for between 1988 and 1990. This limited time
period was necessary for two reasons: first, by using citations as a measure of importance, a
substantial follow-up period was necessary for collecting information on subsequent patent
importance. Second, this time period offers us over a decade of publications in which to search
for disclosures about the technology. Thus, we narrow our focus to 2423 patents representing the
top 1% of patents based on citations received in each U.S. Patent and Trademark Office
(USPTO) technology classification. We refer to the top 1% of the most-cited patents as
breakthrough patents. Data on the breakthrough patents was obtained from the USPTO, initially
cleaned by Hall and others (Hall, Jaffe, & Trajtenberg, 2001) and augmented by Ahuja et. al.
(2005).
17
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 18/40
To explore disclosure patterns, we required an expanded source of articles covering a wide
array of newspapers and journals between 1986 and 2004. In particular, we sought to include
specialized trade journals that rivals might watch more closely. Thus, we obtained articles from
the Factiva archive of news and business information. The archive offers access to nearly 9,000
publications including newspapers, magazines, industry publications and newswires, and spans
multiple countries. The database revealed almost 900 articles serving as initial publicly disclosed
links between the assignee and the technology. We coded the date of a given disclosure as the
first time it appeared in any outlet. The articles were coded for specific characteristics to better
understand the active nature of releases and the types of media channels used. Most frequently
initial announcements were in PR Newswire or Business Wire but in some cases articles
appeared in trade journals and other sources.
To offer a specific example from our data set, Genex Corporation was granted U.S. patent
4,946,778 in August of 1990 entitled “Single Polypeptide Chain Binding Molecules.” They, in
turn, immediately released information to a small trade journal, BioBusiness Daily – the article
even lists the company name and the specific patent number. The purpose of the press release
was quite clear – they wished to identify partners who might be interested in licensing their
technology in place of previous, less effective methods. The article stated, “The company is
seeking corporate partners that plan to replace ‘their monoclonal antibodies with our better
performing SCA proteins,’ says Reed R. Prior, Genex president and CEO” (BioBusiness Daily,
1990). There were seven other new articles that mentioned the specific patent but this first article
was published on August 20, 1990 – only thirteen days after the patent was officially granted.
Additionally, data on financial and operating characteristics of the focal firm were drawn
from COMPUSTAT and from the Center for Research on Securities Prices (CRSP). Data on
18
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 19/40
insider stock purchases and sales were obtained from Thompson Financial’s Insider Trading
database.
Dependent Variable
Our dependent variable is whether information about a given patent is disclosed in public
sources in a given quarter. Announcement dates were drawn from the articles retrieved from
Factiva by a three-person research assistant team using search words drawn from the patent title
and/or abstract and the assignee’s name. Because some subjectivity is introduced in the search
word selection, different researchers reviewed the selected articles for relevance. Breakthrough
patents to which no articles could be linked (about 63% of the time) were assumed not to have
been disclosed by their assignees. More than one-third of the articles were published on PR
newswire demonstrating the intentionality of the announcements. While others could not be quite
so easily traced to the firm, it seems relatively unlikely that independent news sources identified
firms’ breakthrough patents without some help or encouragement.
Independent Variables
We use a number of independent variables to account for the release of breakthrough
technology and to test the motivations behind the timing of those releases. Most of the variables
are time varying and can be observed in periods before and after the quarter being analyzed (e.g.,
backward and forward lags).
Resource Needs. There are several measures that measure the extent to which firms are
resource-constrained. In general, we focused on firm size and efforts to acquire resources. Firm
size is a potential indicator of the firm’s social and contractual ties and endorsements (Pfeffer &
Salancik, 1978; Singh et al., 1986). We measure firm size using total assets data drawn from the
COMPUSTAT database one year prior to the focal period (Assets t-1). This is a time varying
19
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 20/40
covariate on a quarterly basis and the subscript “t-1” indicates that it was lagged one year. 3 In
this way, our analysis focuses on whether the firm’s size (i.e., assets) leading up to a given point
in time help to predict whether it was under pressure to release information about technological
breakthroughs it had achieved.
Resource needs as a motivation for disclosure can be more directly measured by looking at
focal firms’ resource-related activities before and after the announcement. We identified resource
acquisition activities using several measures. First, funding joint ventures (Fundingjv t-1) refer to
the number of funding joint ventures entered into during the prior year. We also measured the
funds raised in external capital markets (CapRaisedt-1) during the prior year from new issues of
debt and equity (stock). Finally, R&D-intensive firms (R&Dintt-1) spend heavily on R&D
activities relative to their revenues. Such firms may be under relatively more pressure to
demonstrate that these investments are bearing fruit in order to secure resources for future R&D
activities. This may prod the firm to announce its breakthrough patents relatively earlier.
Technology Exploitation. Six variables were included to indicate disclosures as a strategy to
exploit the technology in the market. Manufacturing (Mfgt+1q) and supplier (Suppliert+1q)
alliances occurring after the focal quarter indicate that the firm is working to bring a technology
to market. Since these types of alliances suggest that the firm is not quite ready to offer the
product for sale (e.g., still forming alliances to produce it) and might delay public
announcements of the breakthrough until it is ready for sale.
In contrast, alliances that involve licensing the technology, such as exclusive- (Excllict+1) or
cross-licensing (Crosslict+1), suggest that the firm does not need to wait for a product to be ready
and can begin to license the technology sooner. A public announcement might help to generate
3For all of our measures, “t-1” indicates that the variable was lagged one year while “t+1” indicates that aforward one-year lag was applied. In a few cases, we refer to forward and backward lags of one quarter instead of one year. In these cases, the subscript is “t+1q” or “t-1q” respectively.
20
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 21/40
willing licensees as the Genex example presented earlier illustrates. Firms may then disclose
their major breakthroughs in order to promote a technological standard and encourage other
firms to license the technology and abandon research on competing or substitute technologies.
Finally, technology transfer agreements (TechTrant-1q) exploit a breakthrough by using it to
gain access to other technologies. This is not an effort to sell the technology broadly but more
likely to selectively gain access to specific firms. Unlike other forms of exploiting a
breakthrough, this would not require a broad announcement. Rather it involves quietly
approaching specific firms that have valuable complementary technologies.
Managerial Opportunism. Two variables were included to estimate the role of managerial
opportunism. Insider trading around the time of the disclosure is indicative of a short-term
orientation as managers seek to exploit information asymmetries to appropriate rent. To capture
this effect, we include the value of shares purchased by insiders during the previous year
(PurchSharest-1), and the value of shares sold by insiders over the following year (SoldShares t+1).
A one-year window was considered adequate to capture managerial foreknowledge in shares
purchased and succeeding stock increases in shares sold. Insider trading data comes from
Thompson Financial Corporation’s database, which covers all insider trading activity reported to
the Securities and Exchange Commission (SEC). Insiders refer to all senior managers and board
members who must report their trades to the SEC. We exclude shares traded as part of stock
option contracts because the timing of these transactions may be dictated more by the parameters
in the option contract than on strategic considerations on the part of the managers.
Control Variables
To ensure that our findings are robust, we control for a variety of factors that represent the
specific attributes of the patent and the associated application process. Specifically, research has
21
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 22/40
shown that a firm’s industry influences patent policies and thus, information flows (Cohen, Goto,
Nagata, Nelson, & Walsh, 2002; Cohen et al., 2000). As a result, we include the patent’s
technology class as a control for industry and technology class influences. Moreover, the
technology’s importance, as measured by the number of citations received (CitesReceived), may
influence a firm’s decision to disclose information or the extent to which the patent attracts
attention on its own. While our sample already selects the most cited patents in their class, there
is still ample variation in citations and more significant breakthroughs might attract more media
attention. We also control for self citations (SelfCites) – presumably, the more other firms cite
the technology, the more likely it is to appear in the press since the innovation will have been
disseminated more widely. A continuance (Continuance) allows a firm to modify an existing
patent application and reset the application date. Some suggest that this mechanism has been
used to keep critical information from being disclosed as part of the patent application process
(Graham & Mowery, 2004). If so, one would expect that a continuance would reduce the
likelihood of an early announcement. Finally, patents that are pending (PendingMonths) for an
extended period may be delayed because they are relatively complex and/or technical. Normally
managers may prefer to wait to announce a breakthrough until a patent has been granted and
protection is secured. This may prompt them to hold off and announce such innovations later
once the patent process has run its course.
Survival Analysis
The central concept in survival analysis is the hazard rate. Following Kalbfleisch and
Prentice (1980), this is defined as the probability that a firm exits the market in a moment t given
that it has survived until this period t and conditional on a vector of covariates Xit, which may
include both time-varying and time-constant variables,
22
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 23/40
dt
X t T dt t T t it
dt
it Lim),\ Pr(
0
≥+<≤= )Χ;(
→
τ λ
where T is a non-negative random variable (duration), which we assume continuous, so that λ (t)
is an instantaneous rate of, in this case, publicly disclosing a paten.
More specifically, we used a Cox proportional hazards model to predict the hazard of
announcing a breakthrough patent in a given quarter. The estimation is performed using the
semi-parametric Cox Proportional Hazards model (Cox, 1972):
λ (t ;Xit )=λ 0 (t) * exp (Xitβ)
Where λ 0 (t) represents the baseline function obtained for values of covariates equal to 0 (X it
= 0). In this specification, the effect of the independent variables is a parallel shift of the baseline
function, which is estimated for all those firms that do not announce their breakthrough patents
up to a particular period. The baseline function is left unspecified and the model is estimated
maximizing a partial likelihood function with respect to the vector of coefficients β without the
need to estimate the baseline function (although it may be recovered non-parametrically).
The Cox Proportional Hazard model has some desirable properties that make it suitable for
our analysis. First, the baseline function is left unspecified. Hence, the potential problem of
unobserved heterogeneity that may rise when the baseline function is not properly specified is
overcome – a problem that worsens in presence of time-varying covariates. Second, only the
ordering of exit times matters when estimating a proportional hazards model rather than the
actual times by themselves. The latter is an important property since our analysis is based on
calendar time (whereas most previous survival analyses use age as the time dimension in the
survival analysis).
The hazard model is estimated using a period from 1988 through 2004. Since the patents
were granted in the early part of the period (1988-1990), one might suppose that those that have
23
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 24/40
not appeared in the press by then will never be announced. We tested separately whether this
represented a systematic selection bias problem using a Heckman sample selection model.
Although we have not reported those findings here, the interpretation of the results was
effectively identical.
Another issue is that there are, in some cases multiple breakthrough patents assigned to the
same firm. Specifically, the 2423 breakthrough patents were generated by 538 firms for an
average of 4.5 patents per firm. However, these patents were not divided evenly among the
sample – 270 firms (50%) had only one patent and 411 (76%) had 3 or fewer patents. On the
other hand, one firm had 108 breakthrough patents during this period of time. Since some of the
observations are likely not to be independent, we used the robust method of calculating standard
errors and clustered the data by firm to relax the assumption of independence with respect to
patents assigned to the same firm. As a robustness check, we also specified a shared frailty
model which is the survival-data analog to regression models with random effects. A frailty is a
latent random effect that enters multiplicatively in the hazard function. The results were
unaltered by this specification and so the more straightforward robust standard errors are
presented in the next section.
Results
Table 1 presents the descriptive statistics and bivariate correlations of the main variables of
interest for the sample. Based on the correlations, firms appear to be more prone to announce
breakthroughs when they are small and not seeking external funding sources. Licensing
generally increases the likelihood of public announcements as do insider trading activities.
None of the correlations among the independent and control variables are sufficiently high to
warrant concerns about multicollinearity. The highest correlation, between PurchSharest-1 and
24
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 25/40
SoldSharest+1, is .62 and understandable given the natural link between these variables. Other
correlations are substantially lower.
Insert Table 1 about here
Many of these simple relationships are also evident in the Cox Proportional Hazards models
shown in Table 2. The models overall were quite significant as evidenced by the Wald Chi2 tests
and Log Likelihoods. The table includes odds ratios for each variable which indicate the extent
to which changes in the variable increase (odds ratio >1) or decrease (odds ratio <1) the
likelihood that the breakthrough will be announced in the press. Model A shows only the control
variables. Here, it is apparent that very heavily cited patents appear in the press sooner –
naturally, major innovations attract more attention. Surprisingly, those for which a continuance
was filed also have a higher hazard rate. However, as we shall see, this is picking up variance
from other variables that are correlated with continuances but are excluded from this base model.
Continuances reduce the hazard rates in all of the other models.
In contrast, patents that were pending for an extended period and those with a larger portion
of self-citations were less likely to appear in the press. A long patent examination process might
signal that the examiner questioned whether the patent was sufficiently novel (in comparison to
other innovations). If there is overlap with existing patents, this might indicate a possibility of
costly litigation and prompt the firm to avoid disclosing the innovation so it might go
unchallenged. Similarly, for those patents that are heavily self-cited, this indicates that other
firms did not build extensively on the innovation and it was not, therefore, as diffused in the
marketplace. If the patent had relatively narrow or firm-specific applications, it may be less
likely to draw interest in the press and there would be fewer opportunities to license it to other
companies.
25
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 26/40
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 27/40
wait until a product is ready for the market if the firm intends to license the technology
independently. This is evident for both cross licensing and exclusive licensing agreements which
have elevated odds ratios. Accordingly, there is support for H2b which stated that firms disclose
breakthroughs sooner when this helps them to gain market penetration.
Technology transfer agreements offer a very different model for exploiting a breakthrough.
Here the firm may work closely to transfer a technology to a small number of partners to gain
access to the partners’ capabilities. Rather than trying to sell or license the technology broadly,
the focus is on a select few critical partners who have developed valuable complementary
technologies. Accordingly, consistent with H2c, it is not surprising that technology transfer
agreements actually reduce the likelihood that a technological breakthrough will be announced
publicly.
Model D includes the tests of managerial self-interest. Here we see that both shares
purchased previously and shares sold after the focal point in time tend to increase the hazard that
the breakthrough will be announced. It would appear that managers who have purchased a stake
in the firm wish to announce the breakthrough so it is more fully incorporated into the firm’s
stock price. This, in turn, allows them to capture their gains sooner by selling their shares once
the price has adjusted. This seems to indicate, to the degree that the timing of a disclosure can be
connected to insider trading, that managers tend to disclose the information to the public sooner.
Accordingly, H3 is supported.
Model E is the full model with all of the variables included. While there are some minor
differences in the magnitude of effects, the conclusions drawn from the other models are
generally robust when all of the variables are included.
27
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 28/40
Discussion and Conclusion
Our initial question represents something of a paradox: why would a firm announce its
breakthrough innovations and risk drawing the attention of its rivals? The literature on the
resource-based view focuses heavily on isolating mechanisms that prevent rivals from acquiring
or imitating an advantage (Amit & Schoemaker, 1993; Barney, 1991; Lippman & Rumelt, 1982).
However, this literature rarely explores the active role managers may play in preventing rivals
from imitating capabilities or, in some cases, disclosing strategic information about capabilities.
This article has begun to uncover the active role managers may play in the realm of corporate
secrecy.
In part, the dearth of research exploring this topic is because many researchers focus on
isolating mechanisms inherent in resource attributes such as causal ambiguity, firm specificity, or
social complexity (Barney, 1991; Lippman & Rumelt, 1982). As such, the primary managerial
task is to acquire or build capabilities rather than keeping them from rivals (Barney, 1986;
Dierickx & Cool, 1989). It is assumed that once resources are assembled, their innate properties
will assure that they are naturally difficult for rivals to imitate.
However, such resources rarely offer an impermeable barrier for rivals who may hire away
knowledgeable employees, invest in strategic information, or develop their own firm-specific
substitutes (Barney, 1991; Makadok & Barney, 2001). Indeed, many resources become more
imitable as they are deployed. For example, knowledge creation processes require that tacit
knowledge is codified, transferred and used to generate more tacit knowledge (Nonaka, 1994). In
addition, as firms scale up knowledge resources to meet the demands of rapid growth, the
knowledge must be replicated, integrated, and transferred (Grant, 1996; Kogut & Zander, 1992).
28
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 29/40
Thus, in the process of leveraging tacit knowledge into a competitive advantage, the knowledge
must be codified which, in turn, renders it relatively more imitable.
As a result, strategic resources are likely to be costly to imitate rather than absolutely
inimitable. Rivals may be willing to incur these substantial costs if they are aware that the
resource or capability is valuable (Chen, 1996; Ocasio, 1997). In order to justify sizeable
investments, relatively strong signals may be required. In this context, announcements of
breakthrough innovations may offer a signal that spurs rivals to work toward eroding that
advantage.
Our empirical results suggested three forces that guide managers to release such strategic
information: 1) the need for essential complementary resources, 2) the need to broadcast in order
to fully exploit the advantage (e.g., marketing and/or the ability to secure licensing agreements),
and 3) managerial opportunism (e.g., insider trading) whereby managers stand to gain personally
by controlling the timing of when important information is released.
Taken together, these arguments and the associated empirical findings show that there are
strategic reasons for firms to voluntarily disclose important firm information. It is worth noting
that these reasons are consistent with and complement much of the finance research on
information release and stock price. For example, Diamond (1985) provided a positive theory of
voluntary disclosure, showing that investors actually benefit from these firm signals primarily
because they reduce the required investments in information. Similarly, others (Dye, 1986;
Verrecchia, 1990) add to that research by discerning between the disclosure of proprietary and
nonproprietary knowledge. Nonetheless, most of these contributions are purely theoretical,
drawing suppositions from their mathematical models. In contrast, our study provides empirical
support for these ideas.
29
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 30/40
As indicated below, each of the logics for disclosing strategic information offer fruitful
avenues for further research as well as practical implications for firms seeking to exploit
opportunities.
Resource Needs as a “Catch 22”
Here, the need to disclose information in order to fully exploit a breakthrough represents
something of a “catch-22” in that firms without sustained competitive advantages may be forced
to trade away some of the sustainability in order to realize any of the gains. In contrast, firms that
already have strong advantages and reputations need not make such tradeoffs. Their advantages
will tend to be easier to sustain over time. Firms must either disclose information publicly or
share the gains through joint ventures with resource-rich firms.
If, indeed, established firms are more able to build advantages without disclosing them to
rivals, this feedback loop might help to assure more stability among the ranks of top performers.
At the same time, it might shorten the duration of advantages that smaller, less established firms
can hope to achieve. This variation on “the rich get richer” may widen the performance
heterogeneity gap between successful and unsuccessful firms over time.
How then, can managers simultaneously exploit capabilities and actively keep them from
rivals? We hope that this study stimulates further research about the active role managers may
play in balancing corporate secrecy and the need to build strategic capabilities. We have only
begun to scratch the surface.
Drawing Attention to Penetrate Markets
There is also relatively little focus in the strategy literature on the role of strategic disclosure
as a tool to build a customer base for emerging advantages. However, it is clear that letting
customers know about technological breakthroughs can help to sell products. Indeed, the term
30
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 31/40
“new and improved” lies at the heart of many marketing campaigns. Successful
commercialization may require differentiating the technology from substitutes and rival
products. To do so, firms may need to educate customers and potential partners about the
technology’s characteristics. In some cases, efforts to differentiate the product may not be
possible without releasing critical information about the nature of the breakthrough. Thus,
commercialization may also force managers to trade away some degree of secrecy in order to
better sell their products. In addition, our findings are part of a growing literature suggesting that
disclosure to rivals and complementors may also be part of a strategy to establish a dominant
market position (McEvily et al., 2000).
Little research has explored the effects of such strategic disclosures on the magnitude and
duration of competitive advantages. It seems plausible that disclosures might be instrumental in
building a customer base as well as generating licensing revenue. However, their effects on the
duration of an advantage are much less certain. On one hand, disclosure may spur rivals to
imitate or seek substitutes for the breakthrough. On the other, as McEvily, Das and McCabe
(2000) argue, it may encourage some rivals to drop their competing research projects and license
the emerging dominant design. This would seem to be an important and fruitful line of inquiry
suggested by our findings.
The Agency of Disclosure
Finally, this study highlights what may be an important agency problem with respect to
investing in the sustainability of an advantage. As managers seek to appropriate rent, they may
broadcast the firm’s advantage to investors and, in so doing, make it more salient to rivals. This,
in turn, may set in motion efforts to imitate, or substitute for, critical resources. For example, it is
31
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 32/40
common for the value of patents to be eroded as rivals develop substitutes or work-arounds
(Lanjouw, 1998).
The nature of these agency problems offers another promising avenue of inquiry. In general,
the question of rent appropriation is central to the study of competitive advantage and remains a
ripe opportunity for further research (Barney, 2001; Coff, 1999). In this case, distinct preference
differences between managers and investors may affect the duration of a given competitive
advantage depending on what tradeoffs are made. In other words, as stakeholders vie for the rent
from an emerging capability, they make choices that simultaneously impact the magnitude and
duration of competitive advantages.
32
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 33/40
References
Aghion, P., Bond, S., Klemm, A., & Marinescu, I. 2004. Technology and Financial Structure:Are Innovative Firms Different? Journal of the European Economic Association, 2: 277-288.
Ahuja, G., Coff, R. W., & Lee, P. M. 2005. Managerial foresight and attempted rentappropriation: insider trading on knowledge of imminent breakthroughs. Strategic
Management Journal , 26(9): 791-808.
Allen, R. C. 1983. Collective invention. Journal of Economic Behavior & Organization, 4(1):1-24.
Amit, R., Domowitz, I., & Fershtman, C. 1988. Thinking One Step Ahead: The Use of Conjectures in Competitor Analysis. Strategic Management Journal , 9(5): 431-442.
Amit, R., Glosten, L., & Muller, E. 1990. Entrepreneurial Ability, Venture Investments, and Risk
Sharing. Management Science, 36(10): 1232-1245.
Amit, R., & Schoemaker, P. J. H. 1993. Strategic assets and organizational rent. StrategicManagement Journal , 14(1): 33-46.
Anderson, P., & Tushman, M. L. 1990. Technological Discontinuities and Dominant Designs: ACyclical Model of Technological Change. Administrative Science Quarterly, 35(4): 604-633.
Andrews, K. R. 1987. The Concept of Corporate Strategy (3rd ed.). Homewood: Irwin.
Anonymous. 1990. Genex Gets Antigen-Binding Patent. BioBusiness Daily, 10(16): 2.
Arora, A., Fosfuri, A., & Gambardella, A. 2001. Markets for Technology: The Economics of
Innovation and Corporate Strategy. Cambridge, MA: MIT Press.
Arrow, K. J. 1962. The economic implications of learning by doing. Review of Economic
Studies, 29: 155–173.
Barker, R. 2002. Tech Stocks: Follow the Patents? (March 11, 2002).
Barney, J. B. 1986. Strategic Factor Markets: Expectations, Luck, and Business Strategy.Management Science, 32(10): 1231-1241.
Barney, J. B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of
Management, 17(1): 99-120.
Barney, J. B. 2001. Is the resource-based "view" a useful perspective for strategic managementresearch? Yes. Academy of Management Review, 26(1): 41-56.
33
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 34/40
Bekkers, R., Duysters, G., & Verspagen, B. 2002. Intellectual Property Rights, StrategicTechnology Agreements and Market Structure: The Case of GSM. Research Policy, 31(7):1141-1161.
Bessen, J., & Meurer, M. J. 2008. Patent Failure: How Judges, Bureaucrats, and Lawyers Put
Innovators at Risk: Princeton University Press.
Bettis, R., & Prahalad, C. 1995. The dominant logic: Retrospective and extension. Strategic
Management Journal , 16: 5-14.
Bhattacharya, S., & Ritter, J. R. 1983. Innovation and Communications: Signalling with partialdisclosure. Review of Economic Studies, 50(2): 331-346.
Brown, M. A. 1990. The cost of commercializing energy inventions. Research Policy, 19(2):147-155.
Burgelman, R. A., & Sayles, L. R. 1986. Inside Corporate Innovation: Strategy, structure, and
managerial skills. New York: Free Press.
Bushman, R., & Indjejikian, R. 1995. Voluntary Disclosures and the trading behavior of corporate insiders. Journal of Accounting Research, 33(2): 293-316.
Carroll, G. R., & Hannan, M. T. 2000. The Demography of Corporations and Industries.Princeton, NJ: Princeton University Press.
Chen, M.-J. 1996. Competitor analysis and interfirm rivalry: Toward a theoretical integration.Academy of Management Review, 21(1): 100-135.
Cho, T. S., & Hambrick, D. C. 2006. Attention as the Mediator Between Top Management TeamCharacteristics and Strategic Change: The Case of Airline Deregulation. Organization
Science, 17(4): 453-471.
Coff, R. W. 1999. When competitive advantage doesn't lead to performance: The resource-basedview and stakeholder bargaining power. Organization Science, 10(2): 119-133.
Coff, R. W., & Lee, P. M. 2003. Insider Trading as a Vehicle to Appropriate Rent from R&D.Strategic Management Journal , 24(2): 183-190.
Cohen, W. M., Goto, A., Nagata, A., Nelson, R. R., & Walsh, J. P. 2002. R&D spillovers,patents and the incentives to innovate in Japan and the United States. Research Policy,
31(8,9): 1349.
Cohen, W. M., & Levinthal, D. A. 1990. Absorptive Capacity: A New Perspective on Learningand Innovation. Administrative Science Quarterly, 35(1): 128-152.
Cohen, W. M., Nelson, R. R., & Walsh, J. P. 2000. Protecting their Intellectual Assets:Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not). NBER
Working Paper, 7552.
34
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 35/40
Corner, P. D., Kinicki, A. J., & Keats, B. W. 1994. Integrating organizational and individualinformation processing perspectives on choice. Organization Science, 5(3): 294.
Cox, D. R. 1972. Regression Models and Life Tables. Journal of the Royal Statistical Society,34: 187–220.
Cyert, R. M., & March, J. G. 1963 [1992]. A Behavioral Theory of the Firm (2 ed.). Cambridge,MA.: Blackwell.
De Fraja, G. 1993. Strategic spillovers in patent races. International Journal of Industrial
Organization, 11(1): 139.
Diamond, D. 1985. Optimal release of information by firms. Journal of Finance, 40(4): 1071-1094.
Dierickx, I., & Cool, K. 1989. Asset Stock Accumulation and Sustainability of CompetitiveAdvantage. Management Science, 35(12): 1504-1511.
Dushnitsky, G., & Lenox, M. J. 2005a. When do firms undertake R&D by investing in newventures? Strategic Management Journal , 26(10): 947-966.
Dushnitsky, G., & Lenox, M. J. 2005b. When do incumbents learn from entrepreneurialventures? Corporate venture capital and investing firm innovation rates. Research Policy,34(5): 615.
Dutton, J. E., & Jackson, S. E. 1987. Categorizing Strategic Issues: Links to OrganizationalAction. Academy of Management. The Academy of Management Review, 12(1): 76.
Dye, R. 1986. Proprietary and Nonproprietary Disclosures. Journal of Business Finance and Accounting, 59(2): 331-366.
Ethiraj, S. K., & Levinthal, D. 2004. Bounded Rationality and the Search for OrganizationalArchitecture: An Evolutionary Perspective on the Design of Organizations and TheirEvolvability. Administrative Science Quarterly, 49(3): 404.
Ethiraj, S. K., & Zhu, H. 2006. When Does It Pay To Imitate? A Study Of Leader-ImitatorCompetition In The Branded Pharmaceutical Drug Industry, 26th Annual StrategicManagement Society Conference. Vienna, Austria.
Freeman, J., Carroll, G. R., & Hannan, M. T. 1983. The Liability of Newness: Age Dependence
in Organizational Death Rates. American Sociological Review, 48(5): 692-710.
Graham, S. 1997. Keeping Organizational Secrets: Protective Institutional Mechanisms and theirCosts.
Graham, S., & Mowery, D. C. 2004. Submarines and New Technologies: Continuation Patentingin Software and Biotechnology in the 1980s and 1990s. In G. Libecap (Ed.), Advances in the
Study of Entrepreneurship, Innovation, and Economic Growth, Vol. 15: JAI Press.
35
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 36/40
Grant, R. M. 1996. Toward a knowledge-based theory of the firm. Strategic ManagementJournal , 17: 109-122.
Greene, P. G., & Brown, T. E. 1997. Resource needs and the dynamic capitalism typology.Journal of Business Venturing, 12(3): 161-173.
Hall, B. H., Jaffe, A., & Trajtenberg, M. 2001. NBER Patent Citation File: Lessons, Insights, andMethodological Tools. NBER(August).
Harhoff, D., Henkel, J., & von Hippel, E. 2003. Profiting from voluntary information spillovers:how users benefit by freely revealing their innovations. Research Policy, 32(10): 1753-1769.
Harhoff, D., Narin, F., Scherer, F. M., & Vopel, K. 1999. Citation frequency and the value of patented inventions. Review of Economics and Statistics, 81(3): 511-515.
Hussinger, K. 2006. Is Silence Golden? Patents versus secrecy at the firm level. Economics of Innovation and New Technology, 15(8): 735-752.
Jensen, M., & Meckling, W. H. 1976. Theory of the firm: managerial behavior agency costs andownership structure. Journal of Financial Economics, 3: 305-360.
Kalbfleisch, J. D., & Prentice, R. L. 1980. The Statistical Analysis of Failure Time Data. NewYork: John Wiley and Sons.
Kline, S. J., & Rosenberg, N. 1986. An Overview of Innovation. In R. Landau, & N. Rosenberg(Eds.), The Positive Sum Strategy: Harnessing technology for economic growth: 275-305.Washington, D.C.: National Academy Press.
Kogut, B., & Zander, U. 1992. Knowledge of the Firm, Combinative Capabilities, and theReplication of Technology. Organization Science, 3(3): 383-397.
Lanjouw, J. O. 1998. Patent protection in the shadow of infringement: Simulation estimations of patent value. The Review of Economic Studies, 65(225): 671.
Lemley, M. A. 2001. Rational Ignorance at the Patent Office. Northwestern University Law
Review, 95(4): 1495-1533.
Lerner, J. 1994. Venture Capitalists and the Decision to Go Public. Journal of Financial Economics, 35: 293-316.
Levinthal, D. A., & March, J. G. 1993. The myopia of learning. Strategic Management Journal ,14(S2): 95-112.
Liebeskind, J. P. 1997. Keeping Organizational Secrets: Protective Institutional Mechanisms andtheir Costs. Industrial and Corporate Change, 6(3): 623-663.
36
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 37/40
Lilien, G. L., Morrison, P. D., Searls, K., Sonnack, M., & von Hippel, E. 2002. Performanceassessment of the lead user idea-generation process for new product development.Management Science, 48(8): 1042-1060.
Lippman, S. A., & Rumelt, R. P. 1982. Uncertain Imitability: An Analysis of InterfirmDifferences in Efficiency Under Competition. Bell Journal of Economics, 13(2): 418-438.
Makadok, R., & Barney, J. B. 2001. Strategic Factor Market Intelligence: An Application of Information Economics to Strategy Formulation and Competitor Intelligence. ManagementScience, 47(12): 1621-1639.
McEvily, S. K., & Chakravarthy, B. 2002. The persistence of knowledge-based advantage: Anempirical test for product performance and technological knowledge. Strategic Management
Journal , 23(4): 285.
McEvily, S. K., Das, S., & McCabe, K. 2000. Avoiding competence substitution throughknowledge sharing. Academy of Management Review, 25(2): 294-311.
Nonaka, I. 1994. A Dynamic Theory of Organizational Knowledge Creation. Organization
Science, 5(1): 14-37.
Ocasio, W. 1997. Towards an Attention-based View of the Firm. Strategic ManagementJournal , 18: 187.
Pfeffer, J., & Salancik, G. R. 1978. The External Control of Organizations: A Resource
Dependence Perspective. New York: Harper and Row.
Podolny, J. M., & Stuart, T. E. 1995. A role-based ecology of technological change. American
Journal of Sociology, 100(5): 1224.
Riordan, M. H. 1984. Uncertainty, asymmetric information and bilateral contracts. Review of
Economic Studies, 51: 83-93.
Rosenkopf, L., & Almeida, P. 2003. Overcoming local search through alliances and mobility.Management Science, 49(6): 751-766.
Sacks, M. A. 2002. The Social Structure of New Venture Funding: Stratification and thedifferential liability of newness. Research in the Sociology of Organizations, 19: 263-294.
Sharfman, M. P., Wolf, G., Chase, R. B., & Tansik, D. A. 1988. Antecedents of Organizational
Slack. Academy of Management Review, 13(4): 601-614.
Simon, H. A. 1976. Administrative Behavior (Third ed.). New York: The Free Press.
Singh, J. V. 1986. Performance, Slack, and Risk Taking in Organizational Decision Making.Academy of Management Journal , 29(3): 562-585.
37
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 38/40
38
Singh, J. V., Tucker, D. J., & House, R. J. 1986. Organizational Legitimacy and the Liability Of Newness. Administrative Science Quarterly, 31(2): 171-193.
Stuart, T. E., & Podolny, J. M. 1996. Local search and the evolution of technologicalcapabilities. Strategic Management Journal , 17(Summer): 21-38.
Teece, D. J. 1986. Profiting from Technological Innovation: Implications for Integration,Collaboration, Licensing and Public Policy. Research Policy, 15(6): 285.
Trajtenberg, M. 1990. A Penny for Your Quotes: Patent Citations and the Value of Innovations.The Rand Journal of Economics, 21(1): 172-187.
Tushman, M. L., & Anderson, P. 1986. Technological Discontinuities and OrganizationalEnvironments. Administrative Science Quarterly, 31(3): 439-465.
Verrecchia, R. 1990. Information quality and discretionary disclosure. Journal of Accountingand Economics, 12(4): 365-380.
Veverka, M. 2007. Tough Test Ahead For Google (November 12, 2007).
Yli-Renko, H., Autio, E., & Sapienza, H. J. 2001. Social capital, knowledge acquisitions, andknowledge exploitation in young technology-based firms. Strategic Management Journal ,22(6/7): 587.
Zajac, E. J., & Bazerman, M. H. 1991. Blind spots in industry and competitor analysis:Implications of interfirm (mis)perceptions for strategic decisions. Academy of Management
Review, 16(1): 37-56.
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 39/40
Table 1
Descriptive Statistics
9
10
11
12
13
14
15
Mean/s.d.
1
2
3
4
5
6
7
8
1. Announceq
.00 (.06)
1.00
2. R&Dintt-1
-.96
(77.81)
.01•• 1.00
00
0
0
0
••
.02
•••
•••
.02
.06
•••
•••
.00
••
.17
•••
3. CapRaisedt-1
842.82
(3100.88)
-.01••
.01•••1.
4. Assetst-1
9.08
(2.66)
-.01•••
.05•••
.33•••1.00
5. Fundingjvt-1
.09 (.48)
.01•••
.01•••
.00
.16•••1
.00
6. Mfgt+1q
.29 (.73)
.00
.02•••
.11•••
.35•••
.22•••1.00
7. Suppliert+1q
.08 (.41)
.00
.01•••
.04•••
.18•••
.27•••
.32•••1.00
8. ExclLict+1
.10 (.42)
.01•••
.01•••
.05•••
.17•••
.17•••
.26•••
.13•••1.00
9. Crosslict+1
.01 (.13)
.01•
.0
.15•••
.06•••
.01••
.01•••
-.01•••
.00
1.
10.TechTrant-1q
.20 (.75)
.00
.01•••
.08•••
.23•••
.22•••
.38•••
.26•••
.26••• .0
2•••1.00
11.PurchSharest-1
1.74
(10.02)
.01•••
.02•••
.18•••
.42•••
.10•••
.23•••
.12•••
.12••• .05•••
.19•••1.00
12. SoldSharest+1
5.94
(12.04)
.01
•••
.20•••
.46•••
.08•••
.23•••
.09•••
.12••• .05•••
.18•••
.62•••1.00
13.CitesReceived
44.63
(25.29)
.01
-.01•••
.00†
-.11•••
.03•••
-.01••
.03•••
.02
.0
1•••
.04•••
.00
•••1.00
14. SelfCites
.17 (.24)
.00
.00
•••
.18•••
.04•••
.05•••
.02•••
.06
.01••
.04•••
.07•••
.07•••
-.07•••1.00
15. Continuance
.30 (.46)
.01••
-.01•••
-.05•••
-.11•••
-.02•••
-.06•••
-.04•••
.00
.0
0
-.04•••
-.07•••
-.07•••
.00
.01•••1.00
16. PendingMon
20.45
(8.87)
-.01
.00
-.06•••
.02•••
-.02•••
.02•••
.01
.0
1•••
.02•••
-.01•••
.00
•••
-.07•••
-.08
† p< .10, • p< .05, •• p< .01, ••• p< .001
8/7/2019 Coff, Russell W et al. Corporate Disclosure of Competitive Advantages Why firms direct attention toward their brea…
http://slidepdf.com/reader/full/coff-russell-w-et-al-corporate-disclosure-of-competitive-advantages-why-firms 40/40
Table 2
Cox Proportional Hazards Model of Disclosing Breakthroughs
Variables
A
Controls
Only
B
Resource
Needs
C
Exploit
Capability
D
Managerial
Self Interest
E
Full ModelR&Dintt-1 1.001••• 1.001•••CapRaisedt-1 1.000† 1.000•Assetst-1 .846••• .839•••Fundingjvt-1 1.262••• 1.354•••Mfgt+1q .891•• .934Suppliert+1q .841 .819†ExclLict+1 1.261• 1.246••Crosslict+1 1.545• 1.684••TechTrant-1q .850•• .863•
TechTrant+1q .936 .895†PurchSharest-1 1.008† 1.015•••SoldSharest+1 1.008• 1.016••
Controls
CitesReceived 1.011••• 1.008••• 1.010••• 1.010••• 1.008•••SelfCites .895 .806 .887 .826 .779Continuance 1.279•• .745• .866 .905 .698•PendingMonths .970••• .962••• .968••• .969••• .961•••Years ••• ••• ••• ••• •••
Technology Categories ••• ••• ••• ••• •••
Observations 170066 93017 161136 154046 89051WaldChiSq 190.32••• 484.97••• 351.37••• 254.65••• 641.72•••LogLikelihood -5350.4 -3172.35 -5187.11 -5030.75 -3065.28
aOdds ratios are shown. Ratios greater than 1 indicate a heightened hazard associated with the variable (those less
than 1 mark reduced hazards). Statistical significance indicated as follows:
† p< .10, • p< .05, •• p< .01, ••• p< .001