[This paper investigates whether capital market investors, in assessing market values of R&D firms' equity, view R&D limited partnerships (LPs) as increasing both the assets and liabilities of the R&D firms. The contract terms between the R&D firm and the LP suggest interpreting the LP as a call option held by the R&D firm and using option pricing theory to estimate the asset (the present value of the LP-funded R&D project) and liability (the present value of the exercise price) components of the option. Estimates of the LP variables are derived from information provided in footnote disclosures by R&D firms. However, several important assumptions are necessary to derive these estimates because the footnote disclosures do not provide all the data necessary to calculate the option values. The estimates of the LP variables are included as explanatory variables in a cross-sectional market value regression model that is based on the balance sheet identity. Other variables included in the regression model are the assets, liabilities, and in-house expenditures on R&D reported by the R&D firms in their financial statements. The results are consistent with market participants capitalizing in-house R&D expenditures (though SFAS No. 2 (1974) requires R&D expenditures to be expensed as incurred), viewing the call option feature of the LP as relevant information in assessing the market value of the R&D firm, and utilizing the footnote disclosures to assess the option values. The results support the SEC and the FASB positions that require R&D firms with LPs to disclose to investors the existence of and the amount raised through the LP, but the results do not necessarily support the SEC and FASB positions that this disclosure should be made on the balance sheet. The problems I encountered in estimating the LP variables suggest that more detailed disclosures of the terms of the LP option would help investors to assess the market value of R&D firms. More generally, the results suggest that the FASB should pay particular attention to the types of required disclosures and not be so concerned with whether the disclosures should be on or off-balance sheet in their ongoing consideration of financial instruments and transactions.]

[Research and development limited partnerships are a relatively recent alternative to the more traditional debt and equity funding of research and development costs. This paper provides an economic and empirical analysis of the factors that may motivate firms to select limited partnerships as a source of funding. The analysis uses a framework that relies on extant capital structure models and agency theory to derive empirically testable hypotheses. Results of the empirical tests are consistent with both a tax motivation and, to a lesser extent, an off-balance-sheet motivation for firms to use a limited partnership to fund their research and development costs. More generally, the analysis and results offer support for the clientele tax models of Miller [1977] and DeAngelo and Masulis [1980], and the analysis of taxes by Scholes and Wolfson [1984] and Majd and Myers [1985]. The off-balance-sheet results offer some support for agency model predictions.]

Amir and Lev (1996) address two interesting issues: the value-relevance of reported financial information for fast-changing, science-based companies and the value-relevance of nonfinancial information incremental to financial information. Using a sample of cellular phone companies, they report that the financial accounting information is only value-relevant after the inclusion of the nonfinancial information and that the nonfinancial information they examine is value-relevant both by itself and incremental to the financial information. I first discuss details specific to the tests conducted by Amir and Lev before discussing some of the implications offered by Amir and Lev.

ABSTRACT In a broad sample of publicly traded firms, we observe that the share of firms annually reporting pre‐tax book losses increased from about 20% to 40% during 1988–2023. We also observe that 68% of those loss firms have positive cash tax payments (taxpaying loss firms). The amount of taxes paid by these loss firms is substantial and increasing over time. Surprisingly, we observe that taxes paid increase with the magnitude of pre‐tax losses. This study seeks to understand the prevalence of taxpaying loss firms. We examine whether both the extensive margin—the likelihood that a loss firm pays taxes—and the intensive margin—the magnitude of taxes paid—are explained by firm characteristics. We find that multinational status, state taxes, consolidation differences, goodwill impairments, asset write‐downs, extraordinary items, discontinued operations, depreciation differences, the frequency and magnitude of losses, and firm size are key determinants of both the likelihood and the amount of taxes paid by loss firms. We find that the decrease in the statutory tax rate included in the Tax Cuts and Jobs Act of 2017 did not decrease the tax burden on loss firms.

Abstract Presents a reply to the clarification made by Joseph K. Cheung and Mandy Li on the author's interpretation of the component of the call option held by the research and development (R&D) firm with R&D limited partnerships. Difference between their measurements and computations.

Abstract ABSTRACT: Research and development limited partnerships are a relatively recent alternative to the more traditional debt and equity funding of research and development costs. This paper provides an economic and empirical analysis of the factors that may motivate firms to select limited partnerships as a source of funding. The analysis uses a framework that relies on extant capital structure models and agency theory to derive empirically testable hypotheses. Results of the empirical tests are consistent with both a tax motivation and, to a lesser extent, an off-balance-sheet motivation for firms to use a limited partnership to fund their research and development costs. More generally, the analysis and results offer support for the clientele tax models of Miller [1977] and DeAngelo and Masulis [1980], and the analysis of taxes by Scholes and Wolfson [1984] and Maid and Myers [1985]. The off-balance-sheet results offer some support for agency model predictions.

[A common finding in the literature is that systematic post-announcement drifts in security returns are associated with the sign or magnitude of unexpected earnings changes. This paper examines proposed explanations for these drifts. The paper also documents that the systematic drifts in security returns are found for only a subset of earnings expectations models. For a class of expectations models based on the time series of reported quarterly earnings, variables coding (1) the sign and magnitude of the earnings forecast error and (2) firm size independently explain 81 percent and 61 percent, respectively, of the variation in post-announcement drifts. The joint explanatory power of (1) and (2) is 85 percent, indicating that the effect of these two variables is highly collinear. The drifts are a persistent phenomenon over the 1974 to 1981 period with no evidence of being concentrated in a specific subperios. The properties of expectations models based on the time series of earnings are contrasted with earnings expectations models based on security returns. The latter exhibit no evidence of systematic post-announcement drift behavior. The expectations models based on security returns have the appealing property that the assignment of firms to unexpected earnings change portfolios better approximates the independence-over-time assumption. This property means that these models are less vulnerable to the "proxy effect" criticism that has been made of results previously reported in the literature. The results in this paper are based on a sample of over 56,000 observations covering the 1974 to 1981 time period.]

Abstract. Several studies have documented a significant association between firm size and cumulative abnormal returns surrounding quarterly earnings announcements, after controlling for unexpected earnings. The sign of the association depends on the sign of unexpected earnings. Specifically, in a regression of cumulative abnormal returns on unexpected earnings and firm size, the coefficient on firm size is negative for observations with positive unexpected earnings and is positive for observations with negative unexpected earnings. These results hold after adjusting returns for the firm size return effect. In the absence of an economic rationale for firm size per se to be priced in this manner, we draw on extant capital market literature to identify two potential explanations for the signed‐size effect. Each suggests that firm size may be proxying for some misspecification of the relation between cumulative abnormal returns and unexpected earnings: measurement error in the researcher's proxy for unexpected earnings and constrained estimation of earnings response coefficients. The signed‐size effect remains after incorporating numerous procedures to mitigate the influence of each of these misspecifications. We develop implications of ignoring the anomalous signed‐size effect for studies investigating the association between cumulative abnormal returns and unexpected earnings. Studies affected are those that omit firm size (the estimated earnings response coefficient is biased upward), include firm size as a linear additive variable (the estimated coefficient on firm size is generally not interpretable), and include other variables correlated with firm size (their estimated coefficients are generally biased). Résumé. Plusieurs chercheurs ont démontré l'existence d'une relation significative entre la taille de l'entreprise et les rendements anormaux cumulatifs entourant les annonces de bénéfices trimestriels, compte tenu du contrôle des bénéfices inattendus. Le signe de cette relation (positif ou négatif) dépend de celui des bénéfices inattendus. En termes précis, dans une régression des rendements anormaux cumulatifs par rapport aux bénéfices inattendus à de la taille de l'entreprise, le coefficient relatif à la taille de l'entreprise est négatif pour les observations de bénéfices inattendus positifs, alors qu'il est positif pour les observations de bénéfices inattendus négatifs. Ces résultats persistent une fois les rendements ajustés pour tenir compte de l'incidence de la taille de l'entreprise. Faute de fondements économiques sur lesquels appuyer ce genre d'évaluation en fonction de la taille de l'entreprise en tant que telle, les auteurs ont puisé dans les écrits existants relatifs au marché des capitaux deux explications possibles de l'incidence positive ou négative de la taille: l'erreur de mesure de la variable substitutive des bénéfices inattendus utilisée par le chercheur et l'estimation restreinte des coefficients de réaction aux bénéfices. Dans un cas comme dans l'autre, il semble que la taille de l'entreprise puisse servir de substitut lorsque certaines définitions de la relation entre les rendements anormaux cumulatifs et les bénéfices inattendus sont erronées. L'incidence positive ou négative de la taille demeure après l'application de nombreux procédés visant à atténuer l'influence de chacune de ces erreurs de définition. Les auteurs cernent les conséquences que peut entraîner la négligence de l'incidence positive ou négative anormale de la taille, dans le cas d'études portant sur la relation entre les rendements anormaux cumulatifs et les bénéfices inattendus. Les études en cause sont celles dans lesquelles est omise la taille de l'entreprise (le coefficient de la réaction estimée aux bénéfices étant alors biaisé à la hausse), celles qui font intervenir la taille de l'entreprise à titre de variable additive linéaire (le coefficient estimé relatif à la taille de l'entreprise ne pouvant être interprété, de façon générale) et celles qui font intervenir d'autres variables en corrélation avec la taille de l'entreprise (leurs coefficients estimés étant, dans ce cas, habituellement faussés).