Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures
Kenneth J. Merkley
Cornell University - Samuel Curtis Johnson Graduate School of Management
August 1, 2013
Accounting Review, Forthcoming
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.
Number of Pages in PDF File: 52
Keywords: Corporate Disclosure, Research and Development, Earnings Performance, Narrative Disclosure, Qualitative Disclosure
JEL Classification: M41, G10, O31, O32Accepted Paper Series
Date posted: December 21, 2011 ; Last revised: November 2, 2013
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