Narrative R&D Disclosure and the R&D Anomaly

Prior research documents that investors underreact to R&D expense because they have difficulty valuing innovation (Chan et al 2001; Eberhart et al. 2004; Cohen et al. 2013). This phenomenon is commonly referred to as the R&D anomaly. We extend prior research by examining how narrative R&D disclosure in 10-K filings impacts market participants’ understanding of the value of innovation. We first show that narrative R&D disclosure is positively related with future R&D outcome. Despite such value-relevance, we find that R&D anomaly is magnified in intense narrative R&D disclosure firms, as reflected in larger future returns associated with current R&D expense. We further find that the impact of R&D disclosure on the R&D anomaly is more pronounced when the number of investors’ 10-K views is low and when 10-K reports are less readable. Overall, our findings suggest that narrative R&D disclosure does not necessarily help investors’ ability to impound information about R&D into stock prices on a timely basis. Our study has implications for regulators in that users of financial statements have difficulty processing on a timely basis the information contained not only in R&D, but also in R&D narrative disclosure

Managerial Ability and the Quality of Firms’ Information Environment

In this study, we examine the relation between managerial ability and the quality of a firm’s information environment. An emerging stream of research has identified managerial ability as an important determinant of accruals quality and management forecast quality. However, our understanding of the impact of managerial ability on a firm’s broader information environment is incomplete because it captures more than these specific financial reporting disclosures. Using a composite index based on various proxies for a firm’s information environment, we find a positive relation between managerial ability and a firm’s information environment. Consistent with our argument that managers’ equity incentives improve disclosure quality, we find that the quality of a firm’s information environment improves when managers have higher levels of equity incentives. We contribute to the literature by providing more complete and conclusive evidence about the impact of managerial ability on a firm’s broader information environment

Managerial Ability and Income Smoothing

n this study, we investigate whether managerial ability is related to income smoothing and, if so, whether smoothing associated with managerial ability improves the informativeness of earnings and stock prices about future performance. Using a large sample of firms, we find that managerial ability is positively related to smoothing. More importantly, we show that high-ability managers incorporate more forward-looking information about cash flows into current earnings through smoothing, thereby enhancing earnings informativeness. We also find that smoothing associated with high-ability managers improves stock price informativeness about future cash flows. Our study should be of interest to researchers, practitioners, and others concerned with understanding the determinants and usefulness of smoothin

Stock Market Rewards for Earnings that Beat Analyst Earnings Forecasts when the Economy is Unforecastable

This study examines whether and why the stock market assigns an incremental premium to the act of beating analyst earnings forecasts when the economy is unforecastable. Our study uses a novel measure of macroeconomic (macro) uncertainty from Jurado et al. (2015) that captures periods during which the real economy is not forecastable and a regression model that controls for the forecast error throughout the quarter. Results show that during high macro uncertainty periods, the market assigns a greater premium to earnings that beat analyst earnings forecasts compared to the premium assigned to these earnings during low macro uncertainty periods. We also report a lower likelihood of managing earnings to beat analyst earnings forecasts during high macro uncertainty periods, suggesting higher accounting information quality. We further show that the incremental premium in high macro uncertainty periods is mainly concentrated within the group of firms that have both low liquidity risk and high accounting information quality. Evidence from our study should be relevant to those interested in understanding the usefulness of earnings during periods of extreme macro uncertainty and forces that determine accounting information quality

A glimpse into Thurston's work

We present an overview of some significant results of Thurston and their impact on mathematics. The final version of this paper will appear as Chapter 1 of the book "In the tradition of Thurston: Geometry and topology", edited by K. Ohshika and A. Papadopoulos (Springer, 2020)