Reporting Regulation and Corporate Innovation

Abstract

We investigate the impact of reporting regulation on corporate innovation.  Exploiting thresholds in Europe’s regulation, we find that forcing firms to disclose financial statements reduces the number of innovating firms and the average firm’s innovation spending, but it does not reduce industry-wide total innovation spending.  Our results suggest that the regulation imposes proprietary costs on firms, which discourages innovation activity, especially by smaller firms.  We also show that the regulation provides positive information spillovers to other firms (e.g., competitors, suppliers, and customers), especially larger ones.  We complement our analysis with alternative innovation measures, including patents, and corroborate the results with an analysis of reporting changes due to an enforcement reform in Germany.  In sum, the European reporting regulation has aggregate and distributional effects on corporate innovation.  Importantly, it appears to concentrate innovative activities among fewer, mostly larger firms, which could reflect institutional features of our setting or more general economic forces.

Keywords: Financial Reporting, Disclosure, Regulation, Innovation, Patents, Growth

JEL Classification: K22, L51, M41, M42, M48, O43, O47