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Is Silent R&D Productive?


In competitive markets where ideas are getting harder to find, firms have strong incentives to keep their ideas quiet. For this reason, many innovative firms do not disclose research and development (R&D) expenses even if their research efforts are very productive. I identify “silent R&D” firms as firms that operate in an innovative industry and choose not to disclose R&D as a separate line item but instead pool R&D with sales, general, and administrative (SG&A) expenses. I document that there is a significant proportion of silent R&D firms in the sample of the U.S.-listed stocks and that this proportion is stable over time at 13% on average. I show that silent R&D firms are different from missing R&D or trade secrecy firms identified in prior research and are not associated with poor disclosure quality. Finally, I find that silent R&D firms have higher future profitability at the magnitude of about 3 to 4.5 percent accumulated over the next three years. This higher future profitability is primarily due to the higher productivity of their intangible capital. This evidence suggests strongly that silence enshrouds better ideas. Using the findings from this paper, I also provide initial estimates of SG&A reclassification rates for silent R&D firms.

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