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

49 Pages Posted: 13 Nov 2019 Last revised: 16 Apr 2021

See all articles by Svenja Dube

Svenja Dube

Fordham University - Gabelli School of Business

Date Written: April 23, 2020

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

Suggested Citation

Dube, Svenja, R&D investments and management guidance: Trading off information asymmetry and uncertainty in firm disclosure (April 23, 2020). Available at SSRN: https://ssrn.com/abstract=3480874 or http://dx.doi.org/10.2139/ssrn.3480874

Svenja Dube (Contact Author)

Fordham University - Gabelli School of Business ( email )

140 West 62nd Street
New York, NY 10023
United States

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