Corporate R&D Investments Following Competitors’ Voluntary Disclosures: Evidence from the Drug Development Process

This paper examines the role of peer firm disclosures in shaping corporate research and development (R&D) investments. Drawing on models of two-stage R&D races, I hypothesize that a firm could be either deterred or encouraged by peer disclosure of interim R&D success, depending on peer firms’ R&D strength in the race. Using granular, project-level data on clinical trials in the drug development process, I find that a firm's R&D investments in a specific therapeutic area are deterred by disclosures of early-phase trial initiation from strong rivals in the same area but encouraged by disclosures from weak rivals. Cross-sectional analyses show that focal firm strength and disclosure relevance moderate the effects of peer firm disclosure. Overall, my evidence suggests that peer firms’ R&D disclosures can have both proprietary costs and deterrence benefits.     

The effect of management incentives and cross-listing status on the accounting treatment of R&D spending

This paper investigates the effect of management incentives and cross-listing status on the accounting treatment of research and development (R&D) spending for a sample of Canadian hi-tech and biopharmaceutical firms. U.S. GAAP adopts an immediate expensing rule for all R&D spending except for software development costs for which technological feasibility has been established. Contrary to the U.S., Canadian and international standard setters recommend capitalization if development costs meet certain criteria. Because those criteria are largely based on management judgment, capitalization of R&D spending is an accounting choice that can be used for income manipulation or signaling.Using a logit model, we examine how the decision to capitalize R&D spending is influenced by the cross-listing status and several other key firm characteristics that are well documented in the accounting literature. We find that the probability of capitalizing R&D spending increases for cross-listed and non-cross-listed firms in the software industry. The probability of capitalizing R&D spending also increases for firms that are more leveraged, more mature, and have higher level of cash flows from operations. However, the probability of capitalizing R&D spending decreases for larger corporations, firms with more concentrated ownership and highly profitable firms. Overall our results indicate a preference for Canadian firms in the software industry to emulate U.S. accounting practices for R&D spending. They also suggest that firms use the decision to capitalize or expense R&D spending as an earning management tool to either meet debt covenants or to smooth income.     

Entry and capital structure mimicking in concentrated markets: The role of incumbents’ financial disclosures

We examine whether the public availability of product market incumbents' financial disclosures leads to greater capital structure mimicking of incumbents by entrants. Exploiting a change in disclosure enforcement for German private firms in the mid-2000s, we find entrant-incumbent mimicking rises substantially in concentrated markets once incumbents' financial statements are publicly available. Additional tests exploring potential mechanisms are more consistent with interfirm learning underlying the effect than alternative channels. Our findings shed light on the effects of competitor financial statement disclosure on private firms’ initial financing decisions and highlight how capital structure dependencies among peer firms arise.     

The innovation consequences of mandatory patent disclosures

We investigate the effect of patent disclosures on corporate innovation. Using the American Inventor's Protection Act (AIPA) as a shock that increased patent disclosures, we find an increase in innovation for firms whose rivals reveal more information after the AIPA and a decrease in innovation for firms whose own disclosures are divulged to competitors as a result of the law. These findings suggest patent disclosures generate both spillover benefits and proprietary costs. Our findings provide justification for patent disclosure requirements by demonstrating positive externalities: rivals' disclosures facilitate a firm's innovation. However, we also highlight that mandatory patent disclosures can impose proprietary costs on firms. These results broadly contribute to our understanding of the real effects of disclosure, such that forcing firms to share proprietary information can be privately costly but beneficial to other firms.     

Accounting, Intangible Assets, Stock Market Activity, and Measurement and Disclosure Policy—Views From the U.K.

This paper considers the impact of U.K. practices with respect to the measurement and disclosure of intangible assets, focusing on R&D activities. We first update prior U.K. work relating R&D activities to market prices. Second, given the clearly identified role of disclosure outside of the financial statements in helping market participants value R&D expenditures, we consider whether market forces are generally sufficient to ensure adequate disclosures with respect to intangibles by considering the cases of two biotechnology firms involved in the issuance of misleading disclosures. Within this context, we consider how disclosure regulation and enforcement mechanisms have evolved in recent years, and how this evolution has likely been affected by our 'scandal' cases. Our conclusions are that the case of the U.K. does not give rise to any wide-scale concerns about the economic ill-effects caused by the current state of recognition and disclosure with respect to expenditures on intangibles. Further, market forces are unlikely to be sufficient in ensuring honest and timely disclosures with respect to intangibles, but the combination of official regulation and voluntary self-regulation appears to have stemmed the tide of any such disclosure scandals in the U.K.     

R&D tax credits,technology spillovers,and firms' product convergence

Using a difference-in-differences (DiD) setting that leverages the staggered adoption of R&D tax credits across the U.S. states, we show that after a firm receives the tax credits, products of its peers become significantly more similar to the recipient firm. Such product convergence is particularly strong when peer firms face greater pressure from market participants to uphold short-term performances. We further show that the effect of R&D tax credits likely works through the increased technology spillovers, which motivate peers to imitate instead of differentiating. Accordingly, we show that peer firms shift their patent composition from breakthrough to incremental innovations following the R&D tax subsidy.     

The interaction among disclosures,competition, and an internal control problem

This paper studies the effect of an internal control problem on a firm's disclosure policy where firms compete in non-cooperative investment game, with each firm deciding to invest in its current technology or to invest in a non-proprietary innovation. By adopting the innovation, a firm earns higher revenues at the expense of its non-adopting rival. Each principal decides on a disclosure policy for its firm that entails releasing an agent's internal cost report of the firm's current technology to the rival firm. The agent has private information about the current technology's cost and an incentive to overstate the cost. An effect of disclosures is to increase coordination between the firms, which, without a control problem, increases firm profits. However, under the same conditions that disclosures were beneficial without the control problem, disclosures may be harmful to the principal with the control problem because increased coordination between the firms allows the agent to earn higher rents. Competition substitutes for commitment to an investment policy that limits the agent's rents and this disciplining role of competition is diminished with disclosures.     

Vertical merger,R&D collaboration and innovation

This paper studies the effects of vertical merger and R&D collaboration activities on firms' innovation decisions and stock returns based on a continuous-time real option model under market and technological uncertainties. Our analysis confirms vertical merger's benefit in amplifying the potential gain from innovation through eliminating inefficiencies. We show that vertical merger boosts innovation incentives in two ways: it reduces the optimal innovation threshold when firms suspend the project and increases R&D investment when firms launch the project. If vertical merger is not possible, R&D collaboration can improve firms' innovation levels as an alternative decision, but inefficiencies still exist which implies less pronounced stimulation effects. Both vertical merger and R&D collaboration can reduce firms' risk when conducting innovation project and weaken the positive R&D-returns relation and financial constraints-returns relation, while these effects of vertical merger are stronger than those of R&D collaboration.     

Public market staging: The timing of capital infusions in newly public firms

We examine financing activities of newly public firms for evidence on capital staging in the public equity market. Staging (sequential financing) can increase issuance costs but can limit costs associated with overinvestment. We find evidence consistent with the hypothesis that staging is employed to help control the overinvestment problem in public firms. Initial public offering (IPO) proceeds, relative to external financing requirements, are smaller for firms with more intangible assets and more research and development (R&D)-intensive firms. Asset intangibility and R&D intensity are also both negatively related to the length of time from a firm's IPO to its first post-IPO capital infusion.     

The positive externalities of IFRS R&D capitalization: enhanced voluntary disclosure

Studies comparing IFRS with U.S. GAAP generally focus on differences in the attributes and consequences of the recognized financial items. We, in contrast, focus on voluntary disclosure resulting from arguably the most significant difference between IFRS and GAAP: the capitalization of development costs—the “D” of R&D—required by IFRS but prohibited by GAAP. Using a sample of Israeli high-technology and science-based firms, some using IFRS and others U.S. GAAP, we document a significant externality of IFRS development cost capitalization in the form of extensive voluntary disclosure of forward?looking information on product pipeline development and its expected consequences. We show that this disclosure is value-relevant over and above the mandated financial information, including the capitalized R&D asset. We also show that the capitalized development costs (an asset) is highly significant in relation to stock prices, and enhances the relevance of the voluntary disclosures.     

Peer effects in corporate disclosure decisions

This study examines peer effects in corporate disclosure decisions. Peer effects suggest that the average behavior of a group influences the behavior of individual group members. Consistent with peer effects, I find that disclosures made by industry peers induce firm disclosure. Peer effects in disclosure are more pronounced when a firm's strategic uncertainty is higher, indicating that peer firm disclosure reduces the external uncertainty arising from the firm's interaction with its industry peers and thus increases the precision of managerial private information. I also find that peer effects are stronger when a firm's dependence on external financing is greater, suggesting that peer firm disclosure increases the costs on firm visibility and reputation in capital markets. Overall, these findings suggest that peer firm disclosure shapes a firm's information environment.     

Access to private equity and real firm activity: Evidence from PIPEs

We study how access to private equity financing affects real firm activities using a broad panel of publicly traded U.S. firms that raise external equity through private placements (PIPEs) between 1995 and 2008. The public firms relying on PIPEs are generally small, high-tech firms that cannot finance investment internally and likely face severe external financing constraints; PIPEs are by far the most important source of finance for these firms. We show that firms use PIPE inflows to maintain extremely high R&D investment ratios and to build substantial cash reserves. We also use GMM techniques that control for firm-specific effects and the endogeneity of the decision to raise private equity and find that PIPE funding has a substantial impact on corporate investment in cash reserves and R&D, and a smaller but significant impact on investment in non-cash working capital, but little impact on fixed investment or acquisitions. Our estimates indicate that R&D investment initially increases by $0.20–$0.25 for each dollar of private equity flowing into the firm, and that PIPE funds initially invested in cash ultimately go to R&D. These findings offer direct evidence that access to private equity finance has an important effect on the key input that drives innovation at the firm- and economy-wide levels.     

Innovation quality of firms with the research and development tax credit

This paper examines innovation quality of U.S. research tax credit users (i.e., firms with currently earned research tax credits). Prior literature reports that the research tax credit is effective in increasing research and development (R&D) expenditures and reducing managers’ myopic behavior. However, little is known about the real (or economic) effect of R&D tax credits, as most of these findings have been based on estimated R&D tax credits rather than actual R&D tax credits. Additionally, some researchers and the government still have concerns about the real effect of R&D tax credits by criticizing the ambiguity and complexity of the tax codes (IRC Section 41). Therefore, I use actual R&D tax credits identified in firms’ 10-K and state R&D tax credits as identification tests to reduce endogeneity issues. My results indicate that research generating R&D tax credits contributes to better innovation quality and higher return volatility but lower pre-tax profitability. Overall, these findings imply that enacting the R&D tax credit provisions would trigger better innovation.     

Peer effects in R&D investment based on interlock network: Evidence from China

Different from extant literature on peer effects within industries or locations, this study aims to investigate whether and why the R&D investment of a focal firm is influenced by that of interlocked peer firms. Using instruments based on intransitivity, we identify positive interlock-based peer effects in R&D investment. Firm-pair evidence corroborates the existence of peer effects by showing that interlocks render similar R&D policies and exogenous policy-induced fractures of interlocks lead to diverging R&D investments. Further analysis indicates that the interactive effects are more salient among firms with access to greater peer information and more severe information asymmetry, suggesting that peer effects are consistent with the information theory. Moreover, peers from different industries/places and focal firms with orientation to the differentiation strategy, embodying greater supply and demand of heterogeneous information, are associated with stronger peer effects. Finally, corporate patent outcomes and Tobin's Q positively react to peers' R&D investment, a sign that the interlock-based peer effects are beneficial to the performance of the focal firm.     

How do corporate websites contribute to the information environment? Evidence from the U.S. and Taiwan

We study corporate website disclosures in the U.S. and Taiwan, two countries with different regulatory and market environments, to provide insights into the uniformity of website content and its contribution to the information environment. We observe significant variation in content both within and between the two countries. U.S. firms with higher analyst following tend to create more transparent financial information environments and provide disclosures that are complementary to analysts’ analyses through their corporate websites. They also tend to provide easier access to investor relations (IR) services if analyst coverage is light or nonexistent. However, neither effect is true in Taiwan where the securities analysis industry is less mature. Individual investors have greater ownership share in U.S. firms with more information about IR services on their websites; however, their ownership share drops as financial disclosure on the firm’s website increases, consistent with institutions diluting individual ownership in firms with more transparency in financial reporting. In Taiwan, however, institutions dilute individual ownership share in firms with less financial information and more trading information on their websites. These results are consistent with Barber et al.’s (2009) findings that institutions find Taiwan firms that attract the aggressive, speculative trading of individuals to be extremely profitable investments. Website disclosures in both countries have some effect on the stock-price response to mandatory earnings releases, but their impact is greater in the U.S. Our findings indicate that website disclosures contribute to the information environment and are related to the degree of interest in the firm by sophisticated market participants. Thus, they provide insights to regulators of both countries as they seek to improve disclosure and “level the information playing field.”     

Government R&D spending,fiscal instruments and corporate technological innovation

Using panel data from 242 cities in China, we examine the impact of government research and development (R&D) spending on corporate technological innovation. We find that listed firms located in cities with higher government R&D expenditures are more innovative than firms in other cities. Further, the positive effect of government R&D spending depends on fiscal instruments and factor allocation. Through subsidies and tax incentives, government R&D spending enhances firm innovation by alleviating financing constraints, improving employee creativity and ensuring efficient operations. We demonstrate that subsidies are more effective than taxes in spurring corporate technological innovation. We also show that the impact of government R&D spending is stronger for state-owned and high-tech enterprises than for other enterprises. Overall, our findings suggest that government R&D spending can substantially improve corporate technological innovation through fiscal instruments.     

Voluntary disclosure practices by foreign firms cross-listed in the United States

This is one of the first large-scale studies to examine the voluntary disclosure practices of foreign firms cross-listed in the United States. We proxy for voluntary disclosure using three attributes of firms’ management earnings guidance: (1) the likelihood of issuance; (2) the frequency of earnings guidance; and (3) a guidance quality measure. After first establishing that market participants view these firms’ disclosures as credible and economically important (i.e., the disclosures are negatively related to analyst forecast errors and the implied cost of equity capital), we compare cross-listed firms’ disclosure practices with comparable US firms and explore variations in disclosure practices among cross-listed firms. We find that cross-listed firms issue less frequent and lower quality management earnings guidance than comparable US firms. We further show that the gap between US and cross-listed firms widened after passage of Regulation FD, a regulation which induced greater public disclosure of firm-specific information. Focusing on the sample of cross-listing firms, we show that firms from common-law countries disclose more than firms from code-law countries. Finally, our results indicate that cross-listed firms that do not list on an organized US exchange provide more frequent and higher quality disclosure than those that do list on organized exchanges.     

International operations and voluntary disclosures by U.S.-based multinational corporations

This study uses analysts' ratings of firms' disclosures to examine how the differences between U.S. and foreign disclosure environments affects the voluntary disclosures of U.S.-based multinational corporations. We hypothesize that these different disclosure environments discourage U.S-based multinationals from releasing costly information to competitors. Examining how these differences impact U.S. MNCs' reporting may further our understanding of the relationship between voluntary disclosures and differences among countries' accounting standards. Furthermore, it may explain how convergence of mandated accounting standards might impact voluntary disclosures. Controlling for industry membership, firm size, profitability, earnings-return relations, and capital market activity, we find that U.S. firms with more extensive foreign operations tend to provide fewer voluntary disclosures. These results are most robust for informal and flexible disclosures, such as investor relations, where the findings indicate a negative relation between foreign operations and disclosure.     

Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom

The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D. U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth.     

INTERNATIONAL DIFFERENCES IN RESEARCH AND DEVELOPMENT REPORTING PRACTICES: A FRENCH AND CANADIAN COMPARISON

This paper compares the research and development (R&D) disclosure practices in France and Canada, as evidenced in the annual reports of 76 French and 110 Canadian listed companies. It finds that Canadian high-tech companies (hardware, software, and biotechnology) disclose significantly more information on their R&D activities than their French counterparts. It also finds a strong link between R&D intensity and R&D disclosure among Canadian high-tech companies. Canadian companies overall are also found to be more likely to use non-financial disclosure as a means to resolve any R&D information asymmetry, while French firms disclose more traditional financial and accounting information. Canadian companies are also more willing than French firms to provide information concerning their future R&D expenditures. These results are consistent with inherent cultural and capital market differences between France and Canada. In contrast, the study does not find any significant difference in R&D expenditure capitalization policies between French and Canadian firms.