Uday Chandra
University of Kentucky
Charles Wasley
University of Rochester
Gregory Waymire
Emory University
Abstract: We provide evidence on the profitability and incidence of losses, the properties of cash flow and accruals, and the timeliness of income numbers of US firms in the technology sector. Technology firms are characterized by large investments in soft assets where costs are immediately expensed even when they are associated with future benefits. We hypothesize that for technology firms (relative to non-technology firms): (1) the incidence of losses is greater and this incidence is a function of R&D intensity coupled with growth and firm age, (2) the predictive ability of both current earnings and operating cash flows for future operating cash flows, as well as the relative predictive ability of earnings over cash flows, is lower, and (3) timeliness of earnings in reflecting value-relevant information, and asymmetric timeliness in impounding bad versus good news, are of lower magnitude. Our preliminary results are consistent with these hypotheses.
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