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

• In Event: Valuation

Abstract

This paper underscores the importance of US R&D financial reporting information. We employ a value relevance approach quantifying information on uncertainty of future benefits through revisions of expectations regarding future cash flows. We find that R&D significantly influences the market’s revisions of expectations regarding future cash flows (cash flow news) and discount rates (discount rate news), thereby driving return variance. We further examine the risk relevance of this information with respect to its influence on the sensitivities of firm-level cash flow and discount rate news to market return news. This test serves in gauging whether the stock market beta of R&D active firms is set from fundamental information or investor sentiment. Findings suggest R&D is associated with variation in the sensitivity of firm-level cash flow news to market return news. This is consistent with the view that US R&D accounting is risk relevant. There is no pattern on the sensitivity of firm-level discount rate news to market return news which dismisses the presence of R&D-induced sentiment in the stock market beta of R&D active firms.

Authors

• Dimos Andronoudis, The University of Bristol

• Christina Dargenidou, University of Exeter

• Eirini Konstantinidi, University of Manchester