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An International Meeting of American Accounting
Association
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R&D expenditures and the informativeness of analyst forecast revisions |
Yuan Huang
Hong Kong University of Science and Technology
Guochang Zhang
Hong Kong University of Science and Technology
Abstract: This paper examines the informativeness of analyst forecast revisions for R&D firms. McNichols and O’Brien (1997) argue that analysts are reluctant to disclose unfavorable opinions, and this induces optimistic biases in consensus forecasts and subsequent downward revisions as uncertainties resolve. Extending this argument, we predict an asymmetry between upward and downward revisions in information content and market impact, and that this asymmetry is stronger for high (vs. low) R&D firms. Consistent with our predictions, we find 1) a greater tendency for downward revisions for high (vs. low) R&D firms, 2) that upward revsiions are more closely linked to future earnings than downward revisions; 3) that upward revisions accelerate the pricing of future earnings (but not downward revisions), and 4) a mitigation of abnormal return differentials between high and low R&D portfolios (as found in Chan, Lakonishok and Sougiannis 2001) following upward (but not downward) revisions.