R&D disclosure and the informativeness of future earnings

This study examines the effect of R&D disclosure on the informativeness of share prices about future earnings. Considering its importance to companies, and mindful the uncertain nature of R&D and the limited information provided in the financial statements, R&D disclosure is an important source of information for investors to assess the future prospect of the firm. Using a sample of 6,487 firm-year observations reporting under IFRS from 15 countries over a 10-year period, we show that R&D disclosure conveys information about future earnings, which is incorporated in current returns. Thus, R&D disclosure allows investors to better anticipate future earnings. We find that this result is driven by disclosures in the front end of the annual report, which includes the management commentary section. In additional tests, we find that R&D disclosures are an important source of information to anticipate future earnings in countries with lower corruption levels and in countries with strong enforcement. Finally, we show that higher levels of R&D disclosure relating to the Development phase of R&D, Conditions for capitalisation and Patents and innovation better assist investors to anticipate future earnings. This is the first study to consider whether R&D disclosure assists investors in better anticipating future earnings alongside identifying those topics of R&D disclosure as being most relevant in this process.