R&D investments and management guidance: Trading off information asymmetry and uncertainty in firm disclosure

Abstract

Because R&D projects are inherently risky, R&D expenditures do not only increase information asymmetry but also managers' uncertainty. I examine how managers trade off these opposing forces in their guidance decision. R&D state tax credits serve as instrumental variable for R&D investments. While total earnings guidance frequency does not decrease, higher R&D intensive firms issue more quarterly earnings guidance but less annual earnings guidance. Consistent with managers' uncertainty affecting the precision of longer-term earnings expectations, this guidance pattern intensifies with innovation uncertainty. Higher R&D intensity also leads to more quarterly sales guidance but less annual sales guidance. These findings are inconsistent with the alternative explanation that this guidance pattern derives from managers' uncertainty about R&D expenses itself. Extending the analyses to disclosures in earnings announcement press releases, I find that higher R&D intensity induces more forward-looking disclosures but not R&D-specific guidance. In conclusion, these results imply that managers prefer the issuance of short-term earnings guidance when R&D investments discourage annual earnings guidance.

Keywords: Voluntary Disclosure, Earnings Guidance, Research and Development, Information Asymmetry, Uncertainty

JEL Classification: D82, G30, M41, O32