The Innovation and Reporting Consequences of Financial Regulation for Young Life-Cycle Firms

55 Pages Posted: 11 Jun 2018 Last revised: 23 Jul 2021

See all articles by Abigail M. Allen

Abigail M. Allen

Brigham Young University - Marriott School

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

Kristen Valentine

University of Georgia

Date Written: July 22, 2021

Abstract

Firm life-cycle stage reflects a firm’s current strategic direction towards 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 benefits. Using a generalized difference-in-differences design around SOX, we document a significant reduction in both 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 financial reporting quality materialize to offset these costs. Event study analyses suggests that this negative impact was expected by market participants, and post-regulation returns confirm this expectation.

Keywords: Firm Life-Cycle, Innovation, Explorative Innovation, R&D, Financial Regulation, Corporate Governance, Financial Reporting Quality

JEL Classification: G38; L51; M40; M41; M48; O32

Suggested Citation

Allen, Abigail M. and Lewis-Western, Melissa Fay and Valentine, Kristen, The Innovation and Reporting Consequences of Financial Regulation for Young Life-Cycle Firms (July 22, 2021). Available at SSRN: https://ssrn.com/abstract=3184837 or http://dx.doi.org/10.2139/ssrn.3184837

Abigail M. Allen

Brigham Young University - Marriott School ( email )

Provo, UT
United States

Melissa Fay Lewis-Western (Contact Author)

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

Kristen Valentine

University of Georgia ( email )

Athens, GA 30602
United States

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