Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 397: Research Intensity and Financial Analysts Earnings Forecast: Signaling Effects of Patents

Ali Mohammadi (), Nada O. Basir () and Mehdi Beyhaghi ()
Additional contact information
Ali Mohammadi: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: SE-100 44 Stockholm, Sweden
Nada O. Basir: Faculty of Business and IT, University of Ontario Institute of Technology, Postal: 2000 Simcoe Street North, , Oshawa, Ontario, , Canada, L1H 7K4.
Mehdi Beyhaghi: College of Business,University of Texas at San Antonio, Postal: 1 UTSA Circle, , San Antonio, TX 78249, , United States

Abstract: In this paper, we study how R&D investment affect financial analyst’s earnings forecasts and how intellectual capital endowments moderate this effect. We argue that high information asymmetry and uncertainty associated with R&D investment increase a financial analysts’ earnings forecast error. Patents can remedy this relationship by signaling the ability of a firm in transforming research investments into new and valuable knowledge. Using a panel of 2,253 publicly listed U.S firms, we find that higher R & D intensity is positively correlated with financial analysts’ earnings forecast error. The endowment of intellectual capital (i.e. patents) moderates this relationship negatively. However we do not find any moderating effect for the value of patents measured as forward citations.

Keywords: R&D intensity; Analyst forecasts; Patent; information asymmetry; uncertainty; Capital market

JEL-codes: G24; O32; O34

26 pages, February 3, 2015

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