Financial Reporting Quality and Corporate Innovation

This paper examines the relationship of financial reporting to corporate innovation. Given the importance of a high-quality information system and coordination to innovation, I predict a positive association between financial reporting quality and future innovation. My empirical evidence is consistent with this prediction. I also find some evidence that the positive association between financial reporting quality and innovation is more pronounced for firms with intensive internal research and development activities and for firms in competitive industries. The main findings are robust to using an instrumental variable approach as well as controlling for alternative explanations. I find that firms with high-quality financial reporting transform investment inputs into greater innovation outcomes and firm value. This study provides additional insight into the role of financial reporting quality and its relation to the real economy.