Keywords

firm life-cycle, innovation, explorative innovation, R&D, financial regulation, corporate governance, financial reporting quality

Abstract

Firm life-cycle stage reflects a firm’s current strategic direction toward exploration independent of age or size. We provide evidence that young life-cycle firms are particularly vulnerable to negative innovation consequences from financial regulation but do not appear to experience any compensating financial reporting quality (FRQ) benefits. Using a generalized difference-indifferences design around Sarbanes Oxley Act of 2002 (SOX), we document a significant reduction in both research and development (R&D) spending and innovation outputs for young life-cycle stage firms after regulation. Declines in innovation manifest both from the diversion of scarce resources and from the imposition of an organizational culture mismatched to the pursuit of explorative innovation, resulting in a less generalizable and less diversified patent portfolio. However, we find no evidence that improvements to FRQ materialize to offset these costs. Event study analyses suggest that this negative impact was expected by market participants, and postregulation returns confirm this expectation.

Original Publication Citation

Allen, A., Lewis‐Western, M.F. and Valentine, K., 2022. The Innovation and Reporting Consequences of Financial Regulation for Young Life‐Cycle Firms. Journal of Accounting Research, 60(1), pp.45-95.

Document Type

Peer-Reviewed Article

Publication Date

2022

Publisher

Journal of Accounting Research

Language

English

College

Marriott School of Business

Department

Accountancy

University Standing at Time of Publication

Associate Professor

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