R&D investments and management guidance: Trading off information asymmetry and uncertainty in firm disclosure

Abstract

The immediate expensing of R&D expenditures conceals managers' knowledge about the R&D projects. I examine whether higher R&D-intensive firms voluntarily guide more to decrease this information asymmetry. R&D state tax credits serve as instrumental variable for R&D investments. While total earnings guidance remains unchanged, managers issue more quarterly earnings guidance and non-earnings guidance in lieu of annual earnings guidance. Consistent with uncertainty affecting the precision of longer-term earnings expectations, the substitution of quarterly guidance for annual guidance intensifies with innovation uncertainty. Difference-in-differences analyses around unexpected R&D jumps confirm that the increase in quarterly guidance derives from increases in information asymmetry. These findings demonstrate that firms trade off incentives to decrease information asymmetry with costs of uncertainty from R&D investments by issuing more quarterly and non-earnings guidance but reducing their annual earnings guidance. In conclusion, these results imply benefits of short-term earnings guidance when R&D investments discourage annual earnings guidance.