Accounting-Based Risk and the Valuation of R&D Intensive Firms

48 Pages Posted: 23 Jul 2018 Last revised: 13 Sep 2019

See all articles by Dimos Andronoudis

Dimos Andronoudis

University of Bristol - Department of Finance and Accounting

Christina Dargenidou

University of Exeter Business School - XFI Centre for Finance and Investment

Eirini Konstantinidi

University of Manchester - Manchester Business School

Date Written: June 30, 2019

Abstract

We demonstrate that the uncertainty communicated by US R&D accounting is also risk relevant. First, we quantify the information on the uncertainty of future benefits through revisions of expectations regarding future cash flows. R&D significantly influences the market’s revisions of expectations regarding future cash flows (cash flow news) and, slightly, discount rates (discount rate news). This emphasizes that the uncertainty of future R&D-related benefits drives stock return variance. We then examine the risk relevance of this information through its influence on the sensitivities of firm-level cash flow and discount rate news to market return news. Specifically, we gauge whether the stock market beta of R&D active firms is determined by fundamental information or investor sentiment. R&D drives the variation in the sensitivity of firm-level cash flow news to market return news, which supports the view that R&D accounting is risk relevant. There is no pattern on the sensitivity of firm-level discount rate news to market return news, which addresses concerns about the role of R&D-induced sentiment in the stock market beta of R&D active firms.

Keywords: R&D, Risk Relevance, Cash Flows, Variance Decomposition

JEL Classification: G12, G14, M40, M41

Suggested Citation

Andronoudis, Dimos and Dargenidou, Christina and Konstantinidi, Eirini, Accounting-Based Risk and the Valuation of R&D Intensive Firms (June 30, 2019). Available at SSRN: https://ssrn.com/abstract=3218353 or http://dx.doi.org/10.2139/ssrn.3218353

Dimos Andronoudis (Contact Author)

University of Bristol - Department of Finance and Accounting ( email )

1.04, 15-19 Tyndalls Park Road,
The Priory Road Complex, Priory Road,
Bristol, Avon BS8 1TU
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+44(0)117 394 1504 (Phone)

Christina Dargenidou

University of Exeter Business School - XFI Centre for Finance and Investment ( email )

University of Exeter
Xfi Building, Rennes Dr.
Exeter, EX4 3BZ
United Kingdom

Eirini Konstantinidi

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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