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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


Scott Hayward Goizueta Business SchoolEmory University1300 Clifton Rd.

Atlanta, Georgia 30322Phone: (404) 727-3642FAX: (404) 727-6313


January, 2008

* We wish to especially thank Gary Dushnitsky, Bob Hoskisson, Sharon James-Wade, and JimWestphal for their insightful comments and suggestions.

mailto:[email protected]








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

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“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.

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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.

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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

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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

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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 )

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http://www.uspto.gov/web/offices/ac/ido/oeip/taf/us_stat.pdf





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.

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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

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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

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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

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& 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

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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,

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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

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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

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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

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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).

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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

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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

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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



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



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



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



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



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



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



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



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



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



“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



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



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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



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

coff, russell w et al. corporate disclosure of competitive advantages why firms direct attention...

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