Mandatory Disclosure of R&D Expenditures and Analyst Forecasts

ABSTRACT

Using a natural experiment mandatorily requiring listed firms to disclose R&D activities in the context of China, this paper quantifies the effects of such mandatory disclosure on analyst forecasts, and show that mandatory R&D disclosure significantly decreases analyst forecast accuracy and increases the dispersion of analyst forecasts. Then, we present the underlying mechanisms driving our findings: the ability of analysts and detailed R&D information. Finally, our results are more pronounced in state-owned enterprises and industries with little competition. We show the economic significance of mandatory R&D information disclosure on capital markets. Overall, this study contributes to the literature by evaluating the unintended consequences of mandatory R&D information disclosure on analyst forecasts.

KEYWORDS:

• R&D
• mandatory information disclosure
• analyst forecasts
• China

JEL:

• G38
• G14

Disclosure statement

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

Notes

1. In the revised version, the listed firm is required to add the “4. R&D Expenditure” part in “Section 4 - Director’s Report.” Moreover, the listed firm must state the goals, progress, and expected target of the R&D program; predict the impact of the R&D program on the firms’ future development; and present the proportion of R&D expenditures in the net asset or sale incomes. If the changes in related data exceed 30%, firms need to give the reason.

2. The clear definition of R&D firms provides good research materials that would allow us to investigate the effects of mandatory R&D disclosure using the DID model. For example, Huang et al. (2023) find that the 2012 mandatory R&D disclosure plays a positive role in promoting innovation. However, more literature mainly uses this shock to address endogeneity issues (Lin et al. 2023; Liu, Wang, and Chi 2022).

3. On December 9, 2012, the Corporate Governance and Enterprise Development Research Institution at Beijing Normal University reported the information disclosure index of listed firms in China, and analyzed information disclosure quality. The related URL can be found at: http://finance.china.com.cn/news/20121209/1178529.shtml.

Additional information

Funding

We acknowledge the financial support from the General National Natural Science Foundation of China (No. 71872022), the Fundamental Research Funds for the Central Universities (WUT: 2022IVA068), and Humanities and Social Sciences Youth Fund of Ministry of Education (No. 23YJC790110).