R&D Disclosures and Informativeness of Future Earnings

This study examines the effect of research and development (R&D)‐related disclosures on the informativeness of share prices about future earnings. Considering the importance of R&D to companies, but mindful of its inherently uncertain nature, R&D disclosure is an important source of information for investors to assess the future prospects of the firm. Using a sample of 6,490 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 narratives section of the annual report, which includes the management discussion section. In additional tests, we inter alia show that these findings are primarily driven from firms capitalizing development costs and they are not dependent on the level of stringency of national regulations about R&D disclosures in the narrative section of the annual reports. This is the first study to consider whether R&D‐related disclosure assists investors in better anticipating future earnings and, thus, contributes to the accounting literature and raises important policy implications.