Managers’ Stock-Based Compensation and Disclosures of High Proprietary Cost Information : An Investigation of US Biotech Firms

In this study, we examine whether CEOs' stock-based compensation has any relationship with the disclosure of highly proprietary information. While prior studies suggest that stock-based compensation provides managers with an incentive to enhance their voluntary disclosures in general, we argue that it may not be the case when the proprietary cost is high. By using novel measures capturing the disclosure cost of high proprietary information and focusing on a biotech industry, we find that, on average, managers' stock-based compensation is not significantly related with their disclosure of high proprietary cost information. More importantly, we find that a larger amount of stock-based compensation motivates managers to reveal less high proprietary cost information when they have a stronger need to protect their proprietary information; specifically, (i) when the stage of product development is earlier, (ii) when the corporate board mainly consists of directors with lack of sufficient knowledge on technology, and (iii) when firms are a leader in an industry. Overall, our study contributes to the literature by documenting that the role of stock-based compensation on managers' disclosures can differ depending on the level of proprietary cost of information