The information environment of the firm and the market valuation of R&D

Abstract

We examine whether firms’ information environment influences the market valuation of their hard‐to‐value knowledge assets: R&D capital. We find that a better information environment, as measured by greater analyst coverage, lower earnings forecast dispersion, and greater earnings forecasting accuracy, is associated with higher stock market valuation of firms’ R&D capital. We conduct additional analyses to rule out alternative explanations and test for the direction of causality. Our causal evidence suggests that analysts significantly reduce the information uncertainty surrounding firms’ R&D capital.

Development costs capitalization and debt financing

“…Thus, our analysis indicates how a specific accounting treatment, which is at the heart of the accounting choice literature, is used to reduce information asymmetries to bondholders. Secondly, our study adds to recent literature by identifying R&D capitalization as a further mechanism that helps ‘to correct the potential misvaluation of firms’ R&D investments’ (Zhang & Toffanin, , p. 25). Our findings which demonstrate a positive association between development costs capitalized and future earnings as well as audit fees imply that R&D capitalization under IAS 38 is a costly, albeit effective, signaling device for managers to convey private information about the future success of their R&D projects to debtholders.…”

Can the Gap and Rating of Market Expectation Promote Innovation Input of China Manufacturers?

“…Concurrently, if the market expectation of the institution is slightly higher than the actual operating performance of the enterprise, the managers will face few performance pressures, and in order to meet or exceed the market expectation of the institution, the innovation input will be reduced [8,17]. However, if the market expectation of the institution is much higher than the actual operating performance of the enterprise, in order to meet the market expectation, enterprise managers will be more inclined to adopt revolutionary strategies and increase R&D input [18][19][20]. Therefore, based on the performance feedback theory, some scholars have used the piecewise function to construct regression models and empirically analyze the impact of the gap between the expected performance and the actual performance on enterprise innovation input.…”

“…Institutions' coverage of listed companies can reveal the value of enterprise innovation activities to a certain extent, reduce financing costs, and promote enterprise innovation. Therefore, the increase in the number of coverage institutions will encourage enterprise managers to increase R&D input to a certain extent and make more efforts to develop and commercialize patented technologies, thus enabling investors to improve the market valuation of the company stock [19].…”

“…(2) Independent variables: The previous studies show that the measurement indicators of market expectation mainly include the median of expected indicators such as per-share earnings, leading business income and net profit, gaps between expected indicators and actual indicators of enterprises, and the overall rating [17,19]. Therefore, referring to previous studies, and considering that the prediction and evaluation of institutions are usually effective in the short term, this paper chooses the period of the comprehensive forecast value as 180 days, using the prediction value at the end of the t − 1 year and the prediction value in the middle of the t year to measure MEG and MER, and the formula for calculation is as follows:…”

“…(3) Moderating variables: the moderators mainly consider the impact of government institutional environment and capital market environment on enterprise innovation in this paper. Where, GOS was selected to reflect the government institutional environment, measured by the proportion of government subsidies in the leading business income [10], and INC was selected to reflect the capital market environment, measured by the number of institutions focusing on the listed company [19], and is calculated as follows:…”