Innovation, financial reporting quality, and audit quality

Gerald J. Lobo (), Yuan Xie () and Joseph H. Zhang ()
Additional contact information
Gerald J. Lobo: University of Houston
Yuan Xie: Fordham University
Joseph H. Zhang: The University of Memphis

Review of Quantitative Finance and Accounting, 2018, vol. 51, issue 3, No 6, 719-749

Abstract: Abstract We examine the relation between innovation and financial reporting quality (FRQ) and the implications of audit quality for this relation. We first document a negative relation between innovation and FRQ. This result is consistent with greater earnings management at higher innovation firms, likely because of the more opaque information environment that gives managers the opportunity to act opportunistically. We then examine whether audit quality moderates the observed negative relation between innovation and FRQ because audit quality constrains managers’ opportunities to manage earnings. We find results consistent with the predicted moderating effect. Lastly, we verify that these findings hold in a difference-in-differences test designed around an exogenous event, state R&D tax credits.

Keywords: Patent; Innovation; Financial reporting quality; Audit quality (search for similar items in EconPapers)
JEL-codes: M40 M41 O31 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (10)

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DOI: 10.1007/s11156-017-0686-1

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