R&D Investments and Forward-Looking Disclosures
52 Pages Posted: 13 Nov 2019
Date Written: November 5, 2019
Since proprietary costs discourage managers from providing R&D-specific disclosures, I examine whether firms with higher R&D intensity provide more nonproprietary forward-looking disclosures to decrease information asymmetry. To address endogeneity concerns, I use R&D state tax credit rates as instrumental variable for R&D intensity. I find that firms with higher instrumented R&D intensity guide more frequently and provide more forward-looking statements in earnings announcement press releases. Examining guidance horizon, firms provide more quarterly guidance but less annual guidance as R&D intensity increases. Because R&D intensity also increases managers’ uncertainty about future earnings and managers guide less as uncertainty increases, I test whether earnings volatility alters the relation between R&D intensity and guidance. Indeed, firms provide less annual guidance only if they have high earnings volatility while quarterly guidance is unaffected by earnings volatility. To examine whether the findings are consistent with firms guiding more in response to deteriorating information asymmetry, I conduct difference-in differences analyses around unexpected R&D jumps. Consistent with this information asymmetry channel, I find that firms guide significantly more immediately after such R&D jumps.
Keywords: Voluntary Disclosure, Earnings Guidance, Research and Development, Information Asymmetry, Uncertainty
JEL Classification: D82, G30, M41, O32
Suggested Citation: Suggested Citation