Trading off managerial and investor uncertainty in firm disclosure: Evidence from R&D investments and management guidance

Classic disclosure theory suggests that investor uncertainty increases the probability of discretionary disclosure, while managerial uncertainty decreases this disclosure. Because R&D projects are inherently risky, R&D-intensive firms face high managerial uncertainty as well as high investor uncertainty. This paper empirically examines how R&D intensity impacts the provision, horizon, and content of management earnings guidance. To address endogeneity concerns, state-level R&D tax credits serve as an instrumental variable for R&D intensity. I find that high R&D firms do not provide less earnings guidance than low R&D firms. However, they issue more quarterly guidance but less annual guidance. This substitution strengthens when there is high managerial uncertainty about the success of R&D projects. Consistent with litigation risk leading to asymmetric disclosure incentives, the decrease in annual earnings guidance is concentrated in positive guidance. Overall, the results imply that firms modify the horizon and content of their earnings guidance by substituting long-term positive guidance with short-term guidance when managerial uncertainty discourages the issuance of the former.