Narrative Disclosure and Earnings Performance: Evidence from R&D Disclosures
Kenneth J. Merkley
Cornell University - Samuel Curtis Johnson Graduate School of Management
February 1, 2013
Johnson School Research Paper Series No. 4-2012
This paper examines whether earnings performance relates to the amount of narrative disclosure about R&D activities that firms provide concurrently in their financial reports. While R&D activities are an important source of firm growth and value, our understanding of R&D disclosure decisions is limited. In addition, the unique nature of R&D investments and the limitations of financial statements to communicate information about their value highlight the role of narrative disclosure as a supplement to the financial statements. Based on a detailed analysis of R&D-related disclosures in financial reports from 1996-2007, I predict and find that current earnings performance (adjusted for R&D expense) is negatively related to the quantity of narrative R&D disclosure. Using a content analysis of the detail, tone, and readability of narrative R&D disclosure, I find that the relation between earnings performance and R&D disclosure is consistent with managers providing more information to help investors, rather than using disclosure to spin or obfuscate the firm’s performance. Finally, I provide evidence that narrative R&D disclosure provides useful information to market participants as it significantly affects sell-side analyst behavior, disclosure information content, and information asymmetry.
Number of Pages in PDF File: 62
Keywords: Corporate Disclosure, Research and Development, Earnings Performance, Narrative Disclosure, Qualitative Disclosure
JEL Classification: M41, G10, O31, O32working papers series
Date posted: December 21, 2011 ; Last revised: March 31, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo6 in 0.469 seconds