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Consistent with the uncertainty of research and development’s future benefits, prior accounting studies hypothesize and find a positive relation between research and development (R&D) and the variability of future earnings. However, prior research has assumed constant marginal productivity of R&D in the cross section. We relax this assumption and advance the accounting literature on the informational role of R&D by studying how measures of innovation outputs, namely patent counts and patent citations, which proxy for the economic value of innovation, are related to firms’ future performance. We predict and find that firms’ future operating performance is positively related to the quality of their patents and that this relation is stronger for more productive and innovative firms. We also predict and find that the volatility of future operating performance is negatively related to patent quality and that the relation is stronger for firms with higher R&D expenditures and larger patent portfolios. Overall, firms that have R&D that is more productive exhibit higher and less volatile future operating performance. One contribution of our study is that it demonstrates that the relation between R&D expense (i.e., inputs) and future operating performance is better understood by incorporating information about the productivity’ (i.e., outputs) of a firm’s R&D outlays in the form of patent counts and citations.

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Using a unique and comprehensive data set of monthly information on advertising spending in media outlets, we examine whether managers engage in real earnings management to meet quarterly financial reporting benchmarks. We extend prior literature by: (1) examining quarterly as opposed to annual earnings benchmarks and separating advertising from other expenses, which allows us to incorporate advertising's unique characteristics; (2) exploring the possibility that managers could either reduce or boost advertising to increase chances of meeting an earnings benchmark; (3) investigating the timing, within a fiscal quarter, of altered advertising spending; and (4) analyzing actual activities as opposed to inferring them from reported expenses, which could also be influenced by accrual choices. Our analysis suggests that managers reduce their advertising spending to achieve the financial reporting goals of avoiding losses, avoiding earnings decrease, and meeting analysts' forecasts. We find some evidence that advertising spending increases during the third month of a fiscal quarter. This increase is stronger for managers who have incentives to meet earnings benchmarks and whose firms have higher margins. We find no evidence of an increased tendency to alter advertising spending after the Sarbanes-Oxley Act.