Can Inquiry Letters Make R&D Information Pricing More Effective? Evidence from China

ABSTRACT

There are information transfer motives and earnings management motives for the disclosure of R&D expense information. These two motives contradict each other, which can cause distortion of corporate R&D expense information and lead to mispricing of R&D information. In this paper, we investigate the market reaction to R&D expense inquiry letters (hereafter, RDILs) and their impact mechanism from the perspective of correcting R&D information mispricing by using Chinese A-share listed companies from 2015 to 2019. We find that RDILs have a significantly negative market reaction, suggesting that they have additional information content. Mechanism analyses indicate that this information content is affected by the inquiry letter characteristics and the R&D characteristics of the inquired firm. The findings of this paper have implications for how developing countries can use capital markets to stimulate corporate innovation, and for the establishment of proactive inquiry mechanisms to address the mispricing of innovation information. Exchanges in other countries should consider their use.

KEYWORDS:

• R&D expense inquiry letter (RDIL)
• R&D information pricing
• R&D expenses
• inquiry letter characteristics
• firm’s R&D capability

JEL:

• G31
• G34
• G38

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1. The data in this article were obtained from the SZSE website and the SSE website. The number of inquiry letters issued before 2015 in the website is very small, only five exist between December 6, 2014 and December 26, 2014, involving four companies. Due to the absence of the variables to be tested in the follow-up test, they were excluded from the test. Therefore, the final sample selection period is 2015 to 2019.

2. We also try the event windows of [−1, 3] and [−1, 5], and the test results are consistent with the main results.

3. We also test the event window of [−3, 3] and [−5, 5], and the results do not change significantly. For space-saving concerns, we do not report the results in the paper.

Additional information

Funding

Yan Yu gratefully acknowledges the financial support from the National Natural Science Foundation of China [#72172008].