Trading Off Managerial and Investor Uncertainty in Firm Disclosure : Evidence from R&D Investments and Management Guidance

This paper empirically examines how R&D intensity impacts the provision and nature of management earnings guidance. R&D-intensive firms face high managerial uncertainty as well as high investor uncertainty, which have countervailing effects on discretionary disclosure. I find that high R&D-intensive firms do not provide less earnings guidance than low R&D-intensive firms. However, they issue more quarterly but less annual earnings guidance. This substitution is stronger when there is high managerial uncertainty about the success of the R&D project. Finally, this paper establishes a nonlinear relation between firms’ guidance decisions and R&D intensity in that managers issue less annual earnings guidance once R&D intensity reaches a certain threshold. To address endogeneity concerns, state-level R&D tax credits serve as an instrumental variable for R&D intensity. Overall, the results imply that firms modify the nature of their earnings guidance by substituting long-term guidance with short-term guidance when managerial uncertainty discourages the issuance of long-term guidance