Competitive Costs of Disclosure by Biotech IPOs


  • We thank Ray Ball, Philip Berger, Richard Leftwich, and Abbie Smith (the editors); Josh Lerner; Dana Ono; and especially Russell Lundholm (the referee) for helpful comments and suggestions. We also thank Chen Chen, Murali Jagannathan, Srini Krishnamurthy, Scott Richardson, Kristian Rydqvist, Shyam Sunder, Jian Zhou, and participants of the 2003 Journal of Accounting Research conference and SUNY-Binghamton seminar for their assistance.


This study empirically examines the impact of various competitive cost proxies on the extent of product-related information disclosed by biotech initial public offerings (IPOs) in their prospectuses. The choice of biotech companies, which operate in a fiercely competitive environment, crystalizes the importance of competitive disclosure costs. The focus on product-related information is aimed at a disclosure set for which potential competitive harm is a priori substantial. Our empirical analyses establish three disclosure determinants: the stage of product development, availability of patent protection, and venture capital backing. Additionally, we find the relative size of ownership retained by pre-IPO owners to be negatively related to the extent of disclosure, as predicted by signaling models. We also document the expected inverse relation between the extent of information conveyed by the biotech IPOs and widely used measures of information asymmetry: the bid-ask spread and quoted depth, as well as stock return volatility.