Earnings Variability and Disclosure of R&D: Evidence from Press Releases

Abstract

This study explores press releases in the pharmaceutical industry to expand our understanding of how investments in R&D outlays influence uncertainty of future earnings. The findings make two contributions to the literature. First, they provide evidence that equal investments in different R&D ventures are associated with differential variability of future earnings. This result suggests that non‐financial information contained in press releases captures attributes of firm‐specific R&D investments that are not revealed through R&D expenditures reported in financial statements. Second, prior studies have indicated that investments in pharmaceutical R&D are associated with the highest variability of future earnings among all industries. The results, however, suggest that for a large class of low‐risk pharmaceutical R&D investments, the relative variability of future earnings is low and similar to that generated by capital expenditures. The findings hold when we control for endogeneity in voluntary disclosure of press releases.

Investment in Employees and Research and Development and the Signalling of Intellectual Capital by UK Listed Companies

“…The economic decision to invest in intangible inputs must necessarily be based on the economic returns or outputs of the investment; furthermore, the economic returns from a timely voluntary disclosure policy must be accounted for as R&D expenditure and employee costs do not convey the IA value generated by these investments. This approach is consistent with that adopted by Weissa, Falkb, & Zion, (2013) who provide evidence that suggests voluntary press releases provide non-financial information that is not captured by R&D expenditures reported in financial statements. Gelb (2002) undertook a similar study on two high technology industries, in which supplemental voluntary disclosures in (1) annual report (2) quarterly reports and other voluntary publications and (3) investor relations programs, were investigated to determine whether firms with significant levels of intangible assets choose the more flexible voluntary supplemental disclosures ahead of the traditional annual report.…”

Research and Development, Uncertainty, and Analysts’ Forecasts: The Case of IAS 38

“…Weiss et al. () illustrate that equal investments in different R&D ventures are associated with differential variability of future earnings in the US‐GAAP setting where R&D capitalization is not allowed. Their findings suggest that additional information is needed to incorporate the information contained in earnings variability in forecasts.…”

“…Weiss et al. () evidence indicates that high‐risk R&D investments are accompanied by a significantly larger frequency of press releases to meet the needs for additional information when uncertainty is high. Instead of press releases, R&D capitalization may provide such additional information by signaling the prospects of the project to the market.…”

Disclosures About Key Value Drivers in M&A Announcement Press Releases: An Exploratory Study

“…Second, an extensive literature has analyzed earnings press releases (Levi, 2008; Hafzalla, 2009; Huang et al ., 2014; Kimbrough and Wang, 2014; Lundholm et al ., 2014; Bozanic and Thevenot, 2015; Miao et al ., 2016; Black et al ., 2017; Blankespoor et al ., 2018), restatement press releases (Files et al ., 2009), post‐restatement press releases (Chakravarthy et al ., 2014), press releases and R&D information (Weiss et al ., 2013), and other press releases (Fernández et al ., 2011). Unlike those studies, we analyze press releases related to a strategic investment decision, acquisition, that has received relatively little academic attention 9 .…”