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

• Published in: Accounting and finance (Parkville) 2013-09, Vol.53 (3), p.837-865
• Main Authors: Weiss, Dan, Falk, Haim, Zion, Uri Ben
• Format: Article
• Language: English
• Subjects: Capital expenditures; Disclosure; Earnings forecasting; Earnings variability; G14; M41; Measures of variability; Pharmaceutical industry; Press releases; R&D; Research & development expenditures; Studies
• ISSN: 0810-5391; 1467-629X
• DOI: 10.1111/j.1467-629X.2012.00484.x

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.