Counterpoised Disclosure: Evidence from the Biotechnology Industry 

Research area: Accounting

 

Abstract: This paper examines the causes and effects of counterpoised disclosures, defined as a concurrent, voluntary dissemination of information intended to mitigate adverse consequences of a mandatory disclosure. To capture mandated disclosures, we use the setting of 8-Ks issued by biotechnology firms to disclose material milestones of a drug’s development, such as product-specific regulatory decisions by the Food and Drug Administration (FDA). We formulate and empirically support three predictions. First, we document that managers are more likely to include counterpoised disclosures—specifically, information about other drugs under development—in 8-Ks revealing negative mandatory information (e.g., an FDA rejection) relative to 8-Ksrevealing positive mandatory information (e.g., an FDA approval). Second, we confirm that negative market reactions to the release of negative signal 8-Ks are attenuated for those including counterpoised disclosures. Third, we document that counterpoised disclosure appears consistent with informational rather than opportunistic motivations, as drugs receiving this disclosure treatment exhibit ex posthigher likelihoods of subsequent FDA approval relative to drugs that do not.