Do Mandatory Disclosures Affect a Firm's Decision to Contract with Outside Suppliers?

Abstract

We investigate whether disclosure regulation influences firms' contracting decisions with outside suppliers. In deciding whether to contract with outside suppliers that provide value through their knowledge or expertise, firms face a trade-off between the benefits of the contract (i.e., knowledge gained) and potential information leakage through outside suppliers. We use the patent setting where firms can choose to use the services of a patent law firm that provides access to expert knowledge regarding the technological area in which the client firms specialize. We predict that while firms that face decreased potential costs associated with information leakage are more likely to contract with a patent law firm, firms that face increased potential costs will rely more on inhouse experts. Using the American Inventor's Protection Act (AIPA) as a patent disclosuremandating shock that influences the costs of contracting with a patent law firm, we find results consistent with our prediction. In cross-sectional analyses, we find this result is more pronounced when proprietary costs are more salient. Collectively, our results suggest changes in the information environment due to changes in disclosure regulation affect firms' decision to contract with outside suppliers.