The Real Effect of Financial Reporting: International Evidence

• In Event: Accounting Information and Real Effects

Abstract

We examine the real effect of financial reporting, using a quasi-natural experiment. In 2005, European Union (EU) mandated the adoption of International Financial Reporting Standards (IFRS), which substantially improved firms’ financial reporting practice and transparency. Our Difference-in-Difference (DiD) results suggest that financial reporting has positive real effects: firms that adopted IFRS become more innovative in the long run – they generate more patents and patents with higher impact. We identify two possible channels through which improvements in financial reporting facilitate corporate innovation: increased access to external funding and reduced managerial myopia as a result of increased institutional holdings. Our paper sheds new light on the real effects of financial reporting.

Author

• Xi Li, Temple University