Analysts’ forecast revisions and firms’ research and development expenses

Analysts’ forecast revisions and firms’ research and development expenses This study examines whether reported values for firms’ research and development (R&D) affect analysts’ annual earnings forecast revisions following quarterly earnings announcements. Because R&D introduces uncertainty into earnings forecasts, analysts may benefit from additional information searches in an effort to increase forecast accuracy. Also, accounting standards mandate an immediate expensing of R&D, in essence projecting a zero value for the R&D. To the extent that R&D will produce future payoffs, the expense treatment reduces the informativeness of reported earnings for forecasting future earnings. Thus, the marginal benefit of analysts’ efforts to produce more information may increase with the magnitude of the R&D component of earnings announcements and trigger additional forecast revisions. Alternatively, if the cost of information searches exceeds the benefit, analysts’ forecast revisions may decrease. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Analysts’ forecast revisions and firms’ research and development expenses

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Publisher
Kluwer Academic Publishers-Plenum Publishers
Copyright
Copyright © 2006 by Springer Science+Business Media, LLC
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-006-0013-8
Publisher site
See Article on Publisher Site

Abstract

This study examines whether reported values for firms’ research and development (R&D) affect analysts’ annual earnings forecast revisions following quarterly earnings announcements. Because R&D introduces uncertainty into earnings forecasts, analysts may benefit from additional information searches in an effort to increase forecast accuracy. Also, accounting standards mandate an immediate expensing of R&D, in essence projecting a zero value for the R&D. To the extent that R&D will produce future payoffs, the expense treatment reduces the informativeness of reported earnings for forecasting future earnings. Thus, the marginal benefit of analysts’ efforts to produce more information may increase with the magnitude of the R&D component of earnings announcements and trigger additional forecast revisions. Alternatively, if the cost of information searches exceeds the benefit, analysts’ forecast revisions may decrease.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Jan 17, 2007

References

  • Share Repurchases and Intangible Assets
    Barth, M; Kasznik, R
  • Analyst Coverage and Intangible Assets
    Barth, M; Kasznik, R; McNichols, M

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