Product-Market Competition and Strategic Disclosure of R&D Expenditures

• In Event: Strategic Disclosure

Abstract

R&D plays an increasingly important role in the survival and profitability of firms in knowledge-based
economies. In navigating an R&D race, firms formulate R&D disclosure strategies to influence their extant as well as potential competitors to their advantage. This paper empirically examines whether firms
operating in competitive product markets manage R&D reporting upward or downward, engaging in strategic R&D management (real vs. strategic reporting). We estimate expected R&D and discretionary R&D based on firms’ operational characteristics. We hypothesize that in a competitive environment with high entry threat, firms are likely to increase reported R&D spending (positive discretionary R&D), while firms in product markets with high substitutability are likely to decrease reported R&D spending (negative discretionary R&D). Empirical evidence is consistent with our hypotheses. Future accounting returns to discretionary R&D spending suggest that discretionary R&D is not entirely made up of all real R&D; firms exploit the reporting flexibility afforded in accounting principles to manage R&D reporting. The market appears to treat real and accounting R&D components differently. We find some evidence that such R&D disclosure management is carried out through classification shifting between operating and R&D expenses as entry threat increases. Altogether we find that strategic considerations are important in managing R&D disclosures.

Authors

• Masako Darrough, CUNY-Baruch College

• Jangwon Suh, NY Inst of Tech

• Yannan Shen, New York Institute of Technology