Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures

52 Pages Posted: 21 Dec 2011 Last revised: 16 Jul 2014

See all articles by Kenneth J. Merkley

Kenneth J. Merkley

Indiana University - Kelley School of Business - Department of Accounting

Date Written: August 1, 2013

Abstract

This paper examines how earnings performance relates to firms’ narrative R&D disclosure decisions. The unique nature of R&D investments and financial statements’ limited ability to communicate the value of such investments highlight the role of narrative disclosure as a supplement to the financial statements. I predict and find that current earnings performance (adjusted for R&D expense) is negatively related to the quantity of narrative R&D disclosure. Conducting a content analysis of the detail, tone, and readability of narrative R&D disclosures, I find that managers adjust R&D disclosures based on earnings performance to provide relevant information rather than to obfuscate performance. Finally, I provide evidence that market participants find narrative R&D disclosure informative because it significantly affects sell-side analyst behavior, disclosure information content, and information asymmetry.

Keywords: Corporate Disclosure, Research and Development, Earnings Performance, Narrative Disclosure, Qualitative Disclosure

JEL Classification: M41, G10, O31, O32

Suggested Citation

Merkley, Kenneth J., Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures (August 1, 2013). The Accounting Review, Vol. 89, No. 2, 2014, Available at SSRN: https://ssrn.com/abstract=1974916 or http://dx.doi.org/10.2139/ssrn.1974916

Kenneth J. Merkley (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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