Does Transparency Hinder Technological Novelty? Evidence from Large Pharmaceutical Firms

Problem definition : The drug development process has historically lacked transparency, leading to selective reporting of clinical trial results. Although clinical trial transparency aims to address this issue, increased public scrutiny may make managers more risk averse, potentially stifling novel research and development (R&D) initiatives. This raises the following question. Does transparency hinder technologically novel R&D? Methodology/results : Using data from nearly 10,000 clinical trials from 2000 to 2014, we examine how a 2005 policy to increase transparency affects drug novelty. Using a continuous difference-in-differences approach, we find that transparency prompts firms to rely more on previously used technologies (i.e., exploitative R&D) without reducing their pursuit of never-before-tested technologies (i.e., exploratory R&D). We identify negative informational spillovers as a mechanism; technology failures that are now more visible because of transparency could erode confidence in related trials, prompting firms toward familiar technologies to avoid reputational damage. Consistent with this mechanism, the impact of transparency is strongest among firms with less-diversified portfolios that are the most exposed to negative informational spillovers. Managerial implications : Our primary theoretical contribution is in demonstrating the unintended negative impact of transparency on novelty. For managers, we highlight diversification as a mitigation strategy. We urge policymakers to create incentives to support novel R&D despite transparency pressures.