IDEAS home Printed from https://ideas.repec.org/a/gam/jforec/v6y2024i3p29-549d1430640.html
   My bibliography  Save this article

R&D Expenditures and Analysts’ Earnings Forecasts

Author

Listed:
  • Taoufik Elkemali

    (Accounting Department, College of Business Administration, King Faisal University, Al-Ahsa 31982, Saudi Arabia
    Finance and Accounting Department, Faculty of Economics and Management of Mahdia, University of Monastir, Monastir 5000, Tunisia
    LIGUE Laboratory LR99ES24, ISCAE, University of Manouba, Cité Nasr 2010, Tunisia)

Abstract

Previous research provides conflicting results regarding how R&D expenditures impact market value. Given that financial analysts are the primary intermediaries between companies and investors, our study focused on the impact of R&D-related uncertainty, growth, and information asymmetry associated on analysts’ earnings forecasts. Based on 19,834 firm-year observations in the European market between 2005 and 2020, our results show that R&D activities lead to higher absolute forecast error and negative forecast error, indicating higher forecast inaccuracy with an optimistic bias. Additionally, these investments contribute to higher forecast dispersion, indicating disagreement among financial analysts. The comparison between 17 industries revealed that these effects are more pronounced in R&D-intensive industries than in non-R&D industries, uncovering the varied relationship between R&D investments and analyst forecasts across sectors.

Suggested Citation

  • Taoufik Elkemali, 2024. "R&D Expenditures and Analysts’ Earnings Forecasts," Forecasting, MDPI, vol. 6(3), pages 1-17, July.
    • Handle: RePEc:gam:jforec:v:6:y:2024:i:3:p:29-549:d:1430640
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2571-9394/6/3/29/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2571-9394/6/3/29/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Feng Gu & Weimin Wang, 2005. "Intangible Assets, Information Complexity, and Analysts' Earnings Forecasts," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9-10), pages 1673-1702.
    2. Rahim Bah & Pascal Dumontier, 2001. "R&D Intensity and Corporate Financial Policy: Some International Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(5‐6), pages 671-692, June.
    3. Baruch Lev & Suresh Radhakrishnan & Jamie Yixing Tong, 2021. "Earnings Component Volatilities: Capital Versus R&D Expenditures," Production and Operations Management, Production and Operations Management Society, vol. 30(5), pages 1475-1492, May.
    4. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    5. Anne Jeny & Luc Paugam & Pierre Astolfi, 2019. "The usefulness of intangible assets’ disclosure for financial analysts. Insights from Purchase Price Allocation conditional on deal quality," ACCRA, Association francophone de comptabilité, vol. 25(2), pages 5-53.
    6. Rahim Bah & Pascal Dumontier, 2001. "R&D Intensity and Corporate Financial Policy: Some International Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 28(5-6), pages 671-692.
    7. Chan, Konan & Chen, Hung-Kun & Hong, Li-Hong & Wang, Yanzhi, 2015. "Stock market valuation of R&D expenditures—The role of corporate governance," Pacific-Basin Finance Journal, Elsevier, vol. 31(C), pages 78-93.
    8. Orie E. Barron & Donal Byard & Charles Kile & Edward J. Riedl, 2002. "High‐Technology Intangibles and Analysts’ Forecasts," Journal of Accounting Research, Wiley Blackwell, vol. 40(2), pages 289-312, May.
    9. Daniel Kahneman & Amos Tversky, 2013. "Prospect Theory: An Analysis of Decision Under Risk," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 6, pages 99-127, World Scientific Publishing Co. Pte. Ltd..
    10. James R. Brown & Steven M. Fazzari & Bruce C. Petersen, 2009. "Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom," Journal of Finance, American Finance Association, vol. 64(1), pages 151-185, February.
    11. Anne Cazavan-Jeny & Thomas Jeanjean, 2006. "The negative impact of R&D capitalization: A value relevance approach," European Accounting Review, Taylor & Francis Journals, vol. 15(1), pages 37-61.
    12. Brown, Ld & Richardson, Gd & Schwager, Sj, 1987. "An Information Interpretation Of Financial Analyst Superiority In Forecasting Earnings," Journal of Accounting Research, Wiley Blackwell, vol. 25(1), pages 49-67.
    13. Amir, Eli & Ganzach, Yoav, 1998. "Overreaction and underreaction in analysts' forecasts," Journal of Economic Behavior & Organization, Elsevier, vol. 37(3), pages 333-347, November.
    14. repec:bla:jfinan:v:43:y:1988:i:1:p:1-19 is not listed on IDEAS
    15. Eli Amir & Baruch Lev & Theodore Sougiannis, 2003. "Do financial analysts get intangibles?," European Accounting Review, Taylor & Francis Journals, vol. 12(4), pages 635-659.
    16. Francis, J & Philbrick, D, 1993. "Analysts Decisions As Products Of A Multitask Environment," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 216-230.
    17. Gary Erickson & Robert Jacobson, 1992. "Gaining Comparative Advantage Through Discretionary Expenditures: The Returns to R&D and Advertising," Management Science, INFORMS, vol. 38(9), pages 1264-1279, September.
    18. Feng Gu & Weimin Wang, 2005. "Intangible Assets, Information Complexity, and Analysts’ Earnings Forecasts," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 32(9‐10), pages 1673-1702, November.
    19. Xiang, Erwei & Gasbarro, Dominic & Cullen, Grant & Ruan, Wenjuan, 2020. "Does R&D expenditure volatility affect stock return?," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(3).
    20. Penman, Stephen H., 1987. "The distribution of earnings news over time and seasonalities in aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 18(2), pages 199-228, June.
    21. Lev, Baruch & Sougiannis, Theodore, 1996. "The capitalization, amortization, and value-relevance of R&D," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 107-138, February.
    22. John C. Easterwood & Stacey R. Nutt, 1999. "Inefficiency in Analysts' Earnings Forecasts: Systematic Misreaction or Systematic Optimism?," Journal of Finance, American Finance Association, vol. 54(5), pages 1777-1797, October.
    23. Kwon, Sung S, 2002. "Financial Analysts' Forecast Accuracy and Dispersion: High-Tech versus Low-Tech Stocks," Review of Quantitative Finance and Accounting, Springer, vol. 19(1), pages 65-91, July.
    24. Mary E. Barth & Ron Kasznik & Maureen F. McNichols, 2001. "Analyst Coverage and Intangible Assets," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 1-34, June.
    25. Anne Jeny & Luc Paugam & Pierre Astolfi, 2019. "The usefulness of intangible assets’ disclosure for financial analysts. Insights from Purchase Price Allocation conditional on deal quality," Comptabilité - Contrôle - Audit, Association francophone de comptabilité, vol. 25(2), pages 5-53.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Taoufik Elkemali, 2023. "Uncertainty and Financial Analysts’ Optimism: A Comparison between High-Tech and Low-Tech European Firms," Sustainability, MDPI, vol. 15(3), pages 1-22, January.
    2. Jaimin Goh & Jaehong Lee & Wonchang Hur & Yunchang Ju, 2019. "Do Analysts Fully Reflect Information in Patents about Future Earnings?," Sustainability, MDPI, vol. 11(10), pages 1-17, May.
    3. Tami Dinh Thi & Wolfgang Schultze, 2011. "Capitalizing research & development and ‘other information’: the incremental information content of accruals versus cash flows," Metrika: International Journal for Theoretical and Applied Statistics, Springer, vol. 22(3), pages 241-278, November.
    4. Mei-Chen Lin & J. Jimmy Yang, 2023. "Do lottery characteristics matter for analysts’ forecast behavior?," Review of Quantitative Finance and Accounting, Springer, vol. 61(3), pages 1057-1091, October.
    5. Lorena Mitrione & George Tanewski & Jacqueline Birt, 2014. "The relevance to firm valuation of research and development expenditure in the Australian health-care industry," Australian Journal of Management, Australian School of Business, vol. 39(3), pages 425-452, August.
    6. Higgins, Huong, 2013. "Can securities analysts forecast intangible firms’ earnings?," International Journal of Forecasting, Elsevier, vol. 29(1), pages 155-174.
    7. Namryoung Lee & Jaehong Lee, 2019. "External Financing, R&D Intensity, and Firm Value in Biotechnology Companies," Sustainability, MDPI, vol. 11(15), pages 1-18, July.
    8. Kannan, Yezen & Khallaf, Ashraf & Gleason, Kimberly & Bostan, Ibrahim, 2023. "The relationship between R&D intensity, conservatism, and management earnings forecast issuance," Advances in accounting, Elsevier, vol. 62(C).
    9. Gharbi, Sami & Sahut, Jean-Michel & Teulon, Frédéric, 2014. "R&D investments and high-tech firms' stock return volatility," Technological Forecasting and Social Change, Elsevier, vol. 88(C), pages 306-312.
    10. Hussinger, Katrin & Pacher, Sebastian, 2019. "Information ambiguity, patents and the market value of innovative assets," Research Policy, Elsevier, vol. 48(3), pages 665-675.
    11. Asdemir, Ozer & Fernando, Guy D & Schneible, Richard A. & Tripathy, Arindam, 2017. "Impact of strategy on analyst information," Advances in accounting, Elsevier, vol. 37(C), pages 103-110.
    12. Gaëlle Lenormand & Lionel Touchais, 2008. "La pertinence des actifs incorporels avec les IFRS," Revue Finance Contrôle Stratégie, revues.org, vol. 11(2), pages 173-201, June.
    13. Gaëlle Lenormand & Lionel Touchais, 2008. "The Value Relevance Of Intangible Assets With Ifrs [La Pertinence Des Actifs Incorporels Avec Les Ifrs]," Post-Print hal-03125514, HAL.
    14. Boone, Jeff P. & Khurana, Inder K. & Raman, K.K., 2022. "Accounting estimation intensity, analyst following, and earnings forecast properties," Advances in accounting, Elsevier, vol. 59(C).
    15. Khalifa, Mariem & Trabelsi, Samir & Matoussi, Hamadi, 2022. "Leverage, R&D expenditures, and accounting conservatism: Evidence from technology firms," The Quarterly Review of Economics and Finance, Elsevier, vol. 84(C), pages 285-304.
    16. Guillaume Dumas & Constant Djama & Isabelle Martinez, 2011. "L'innovation : une incitation à la gestion des résultats ?," Post-Print hal-03948479, HAL.
    17. Chan, Konan & Guo, Re-Jin J. & Wang, Yanzhi A. & Yang, Hsiao-Lin, 2022. "Organization capital and analyst coverage," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 81-105.
    18. Allan Hodgson & Suntharee Lhaopadchan & Raluca Ratiu, 2018. "Is advertising under‐resourced in a growth market? Intangible endogeneity and informed trading issues," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 343-373, November.
    19. Sualihu, Mohammed Aminu & Yawson, Alfred & Yusoff, Iliyas, 2021. "Do analysts’' forecast properties deter suboptimal labor investment decisions? Evidence from Regulation Fair Disclosure," Journal of Corporate Finance, Elsevier, vol. 69(C).
    20. Kim, Hyun-Dong & Park, Kwangwoo & Song, Kyojik Roy, 2021. "Organization capital and analysts’ forecasts," International Review of Economics & Finance, Elsevier, vol. 71(C), pages 762-778.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jforec:v:6:y:2024:i:3:p:29-549:d:1430640. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.