Financial Reporting Quality and Corporate Innovation

This paper examines the effects of financial reporting on corporate innovation. After controlling for other determinants of corporate innovation, I find that firms with higher-quality financial reporting exhibit greater innovation. I show that the relation between financial reporting quality and innovation is more pronounced for firms that have greater growth opportunities, those that operate in innovation-intensive industries, and those that have high institutional ownership. Further, I find some evidence that high-quality financial reporting is associated with shorter patent approval time for first-time patent applicants and that it is related to greater R&D performance. Overall, my evidence suggests that high-quality financial reporting facilitates corporate innovation by reducing the information risk inherent in firms that undertake risky but value-enhancing projects.