Management Voluntary Disclosure and R&D Investments

• In Event: R & D, Ownership Disclosure & Social Responsibility

Abstract

We examine the relationship between management voluntary disclosure (i.e. issuance of management earnings forecast) and R&D intensity. R&D is associated with higher information asymmetry. Therefore, managers are more likely to issue earnings forecasts for R&D intensive firms to reduce information asymmetry. However, R&D is also associated with proprietary information costs. Consequently, the association between issuance of management earnings forecast (MEF) and R&D intensity depends on the tradeoff between costs and benefits. Consistent with prior research, we find an inverse relation between issuance of MEF and R&D intensity. However, we also find that the relationship is nonlinear. Forecast issuance increases in the first four quintiles but decreases in the fifth quintile. When we account for nonlinearity, adding the square of R&D intensity, we find a positive association between R&D intensity and MEF. Moreover, we find that the negative association using linear model seems to be observed among only firms reporting a loss but not firms reporting a profit. Prior research suggests that expensing of R&D as opposed to capitalizing it depresses the reported earnings for R&D-intensive firms often leading to reporting more frequent losses. Thus, accounting treatment of R&D seems to be affecting managers’ voluntary disclosures. Further analysis reveals that both reporting losses and nonlinearity contribute to the inverse relationship documented in prior literature. Overall our results suggest that benefits from reducing information asymmetry outweigh the proprietary information costs for R&D firms.

Author

• Ashraf A Khallaf, American University of Sharjah