The Impact of Value‐Relevant Accounting Rules on Innovative Activities

Abstract

The purpose of this paper is to examine the impact of value‐relevant accounting rules on corporate innovative activities. Using US data from 1972 to 2012, we find that value‐relevant accounting rules help innovative companies to reduce R&D funding gaps, which is conducive to companies' innovative activities and potential long‐term benefits. However, a higher risk premium is required by shareholders of innovative companies. Additionally, we find not only that R&D spending is more sensitive to future earnings variability as compared to that occurring commercial intellectual properties and physical assets, but we also find that managers contracted with long‐term compensation plans have greater incentives to engage in innovative activities when value‐relevant accounting rules set in. Overall, we provide evidence on alleviation of information asymmetry between innovative companies and their lenders when accounting information is more value relevant.