Innovation, Financial Reporting Quality, and Audit Quality

• In Event: Continental Breakfast and Research & Education Forum
  In Paper Session: Table 2: Audit Quality I

Abstract

We examine the implications of auditor quality and audit effort for the relation between innovation and financial reporting quality. We first document a negative relation between innovation and financial reporting quality. This result is consistent with greater earnings management at higher innovation firms, likely because of the more opaque information environment that gives managers the opportunity to act opportunistically. We then examine whether auditor quality and/or audit effort moderates the observed negative relation between innovation and financial reporting quality. We reason that a higher quality auditor/greater audit effort constrains managers’ opportunities to manage earnings. We find results consistent with the predicted moderating effect. Lastly, we verify that these findings hold in the presence of an exogenous shock from state-level R&D tax credits.

Authors

• Yuan Xie, Fordham University

• Gerald Lobo, University of Houston-Houston

• Joseph H. Zhang, University of Memphis