52 Pages Posted: 21 Dec 2011 Last revised: 16 Jul 2014
Date Written: August 1, 2013
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: 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