R&D Disclosures and Informativeness of Future Earnings

This study examines the effect of research and development (R&D)-related disclosures on the informativeness of share prices about futureearnings. Considering the importance of R&D to companies, but mindfulof its inherently uncertain nature, R&D disclosure is an important sourceof information for investors to assess the future prospects of the firm.Using a sample of 6,490 firm-year observations reporting under IFRSfrom 15 countries over a 10-year period, we show that R&D disclosureconveys information about future earnings, which is incorporated incurrent returns. Thus, R&D disclosure allows investors to betteranticipate future earnings. We find that this result is driven by disclosuresin the narratives section of the annual report, which includes themanagement discussion section. In additional tests, we inter alia showthat these findings are primarily driven from firms capitalizingdevelopment costs and they are not dependent on the level of stringencyof national regulations about R&D disclosures in the narrative section ofthe annual reports. This is the first study to consider whether R&D-related disclosure assists investors in better anticipating future earningsand, thus, contributes to the accounting literature and raises importantpolicy implications.