Do R&D-intensive firms publish in academic journals to communicate with investors? 

By | April 27, 2023

Investors may find firms engaged in research and development (R&D) attractive investment opportunities due to their high growth potential. At the same time, R&D is a risky, uncertain process, and the progress of a firm’s R&D activities is difficult for outsiders to assess, resulting in substantial information asymmetry between firms and investors. Firms in the biotechnology sector are an illustrative example. While developing new therapeutics may result in significant future revenue streams, the current earnings performance of many firms is negative due to the substantial investment requirements and the lack of product revenues. In such a setting, traditional earnings per share forecast guidance may have limited utility as a means of disclosure.  

So, how can firms credibly inform investors about the progress of their R&D programs? Our recent study in Management Science addresses this critical question by empirically analyzing the use of non-financial disclosure, especially publication in scientific peer-reviewed journals, to communicate with financial markets. 

Theoretical considerations 

Theoretical studies show that firms may improve their information environment and reduce capital costs by providing R&D-related information through credible channels. However, as a downside, augmented disclosure may inform the research programs of other firms, intensifying competitive threats. Therefore, disclosing R&D information entails an important trade-off that balances the gains from reduced information asymmetry and capital costs with the costs of revealing proprietary information to competitors.  

In our study, we investigate this trade-off by analyzing how firms adjust non-financial disclosure in the form of peer-reviewed scientific publications as a response to changes in their information environment. Analyzing the role of scientific publications is motivated by the observation that many R&D-intensive firms publish a substantial portion of their findings in scientific journals. Large companies such as Alphabet (Google), IBM, and Merck are included in the prestigious Nature Index (which lists the most productive academic institutions). However, why should investors care about publications in peer-reviewed, academic journals? 

Scientific publications have interesting properties as a means of credible information disclosure. First, manuscripts are subject to rigorous peer review that certifies the quality of their content. Second, publications indicate novelty since reputational awards in the academic sciences are allocated based on priority claims on novel and original findings. Consequently, publication, especially in the most selective outlets, requires timely disclosure of research activity, often at the early stages of technological development. Third, unlike in economics and finance, the time lag between initial submission and publication is short. Finally, well-known journal rankings allow non-experts to infer quality at the time of publication. 

These features make scientific publications eligible as a disclosure channel in settings where firms would like to conduct timely disclosure, such as when responding to unexpected, adverse shocks to their information environment. This differentiates scientific publications from patents, which could serve as an alternative disclosure vehicle with reduced proprietary costs given their nature as legal exclusion right. While patents also provide helpful information regarding a firm’s progress in its R&D programs, publication of the technical description usually takes place 18 months after filing. The grant event that certifies patentability and the novelty of the patent claims lies even further in the future. Correspondingly, we hypothesize that firms use publication in peer-reviewed journals as a disclosure channel.  

Empirical setting and findings 

To address our research question, we utilize a quasi-experimental design that leverages the unexpected decline in a firm’s information environment caused by broker house mergers and closure events, which reduce sell-side analyst coverage. As sell-side analysts are important information intermediaries that collect, process, and communicate information about firms’ R&D programs, information asymmetry between the firm and investors increases when fewer analysts report about a firm. 

Our core finding is that firms respond to such adverse events by notably increasing disclosure through scientific publications. In our baseline econometric analysis, we find that the treated firms (i.e., firms that lose one analyst) increase their scientific publication outputs by 12.6% relative to the control firms for which analyst coverage remains unchanged. This effect becomes remarkably stronger if affected firms already experienced financial constraints and high capital costs before the analyst coverage reduction. Similarly, firms for which disclosure implies less proprietary costs increase their scientific publication outputs more strongly, consistent with the idea that firms are conscious of competitive threats. 

Interestingly, but consistent with our predictions that traditional financial disclosure is of limited use in our setting, we do not find evidence that R&D-active firms similarly increase the frequency of earnings guidance forecast provisions. We also do not find indications that firms file more patents for disclosure, which aligns with the idea that patents are not well suited as a disclosure channel in settings where firms must respond rapidly. We comprehensively examine potential alternative explanations, such as the possibility that firms increase R&D investments, which subsequently translates into more frequent publication. However, our empirical analysis does not provide support for these alternative mechanisms. The increase in the number of publications is almost immediate, which suggests that firms ramp up the publication of existing R&D outcomes.  

We also examine whether firms’ scientific publication outputs are associated with investor attention and financial market benefits. Our analysis shows that scientific publications are associated with greater investor attention, as measured by the number of searches for the company ticker on Google, news coverage, and company searches via Bloomberg. We further document that scientific publications are associated with reductions in bid-ask spreads, a common proxy for information asymmetry. This set of complementary findings supports the interpretation that peer-reviewed scientific publications can serve as an effective tool for firms to communicate with financial markets. 

Conclusion 

Overall, our study highlights the important role of non-financial disclosure for R&D-intensive firms in their investor communications. We show that firms use scientific, peer-reviewed publications to provide credible signals about the state and progress of their R&D programs. Concurrently, our study indicates the limitations of traditional financial disclosure means in the context of R&D-intensive firms.  

 

Stefano Baruffaldi is an Associate Professor at the Department of Management, Economics, and Industrial Engineering, Politecnico di Milano, Italy. 

Markus Simeth is an Associate Professor at the Department of Strategy and Innovation at Copenhagen Business School, Denmark. 

David Wehrheim is an Assistant Professor at the Strategic Management Department at IESE Business School, Spain. 

 

This blog post is adapted from their paper “Asymmetric Information and R&D Disclosure: Evidence from Scientific Publications”, published online (open access) in articles in advance at Management Science (https://doi.org/10.1287/mnsc.2023.4721).  

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