Better innovation subsequent to political content disclosure: Evidence from China

This paper examines how political content disclosed in MD&A affects corporate innovations using a larger sample of Chinese listed firms between 2012 and 2023. Faced with an innovation climate arising from government policies, firms’ sensitivities to these policies affect their corporate innovation strategies. We find that more political content disclosure suggests more efficient corporate innovation in the future. Our results are disturbed little after a series of robustness checks. Then we examine three potential channels through which Chinese firms promote corporate innovations. One is the increased input on R&D, including investments and research staff. The second is to offer equity incentives to executives and monetary compensation to employees. The third is more government support and preferential policies, such as subsidies and tax preferences. Lastly, the effect of political content disclosure on corporate innovations is more significant for the firms that have a stronger demand to attract investors (e.g., the firms with bad performance, and the financially constrained firms), and the firms that attach importance to core competence (e.g., high-tech firms, and firms in the fiercely competitive industry). Our findings show the importance of innovation climate arising from government policies and contribute to the emerging literature on enterprises’ different perceptions of such policies.