Paul J. Simko

The Usefulness of Biotechnology Firms' Drug Development Status in the Evaluation of Research and Development Costs

In this paper we examine whether the in-process drug status of developmentstage biotechnology firms helps investors assess if research and development costs indicate an expected future benefit, and therefore an economic asset. Our motivation stems from the conclusion drawn by the AICPA’s Special Committee on Financial Reporting (the Jenkins Committee) that investors want (need) additional nonfinancia1 information to help evaluate a firm (AICPA [ 1994]), and from current concern by some that financial statement information has less value-relevance for researchintensive firms (e.g., Lev and Zarowin [1999]; Stewart [1997]). The current controversy surrounding unrecognized intangible assets developed through research and development is largely a question of at what point, if any, an expected future benefit is reliably measurable. The result of this measurement issue is that most research and development costs are fully expensed, consistent with financial accounting’s long tradition of not overstating net income or assets when sufficient measurement uncertainty exists. As one exception, the capitalization of software development costs allowed in SFAS No. 86 is based on an identifiable threshold of technological feasibility (FASB [ 19851). By achieving technological feasibility the risk of failure has been reduced to the point where expected future benefits are sufficiently reliable to justify capitalization. Our inquiry centers on nonfinancial drug-development-stage data because it similarly provides a formalized structure

Earnings Smoothing, Analyst Following, and Firm Value

This paper examines whether earnings smoothing based on accounting discretion is positively associated with value when less information is otherwise available. We estimate a smoothing index which measures the decrease in earnings per share volatility related to the use of discretionary accruals, and proxy for a firm’s information environment using the number of analysts following the firm. In unconditional tests, we find a modest though statistically significant premium for firms that smooth earnings. However, consistent with our hypothesis, we find that this premium is concentrated among firms with low or no analyst following. On average, we find no relation between firm value and earnings smoothing for firms with a high analyst following. These findings are consistent with findings that earnings smoothing increases the informativeness of earnings.

Voluntary Disclosure of the Components of Revenue Growth

In this study we examine the valuation implications for different sources of growth. Specifically, we investigate whether supplemental information provided by firms to assist financial statement users in understanding the sources of growth is reflected in a premium to those firms. We examine a unique sample of firms that voluntarily choose to provide detail about their levels of organic revenue growth. Results indicate that firms that are larger, with lower research and development expenditures, and with higher intangible assets are those more likely to provide detailed disclosures about revenue growth components, all characteristics consistent with incentives to provide additional transparency regarding revenue growth. In regressions of returns on earnings disaggregated into revenue growth and costs, we find evidence that there is indeed a valuation premium to organic growth relative to non-organic growth. These findings are consistent with investors viewing the organic growth component of revenues as more persistent than the non-organic component of growth. Consistent with this interpretation, we document significant persistence of organic revenue across periods and a notable lack of such persistence for non-organic revenue growth.