Reporting Regulation and Corporate Innovation

Abstract

We investigate the impact of reporting regulation on corporate innovation. Exploiting thresholds in Europe’s regulation and an enforcement reform in Germany, we find that forcing firms to publicly disclose their financial statements reduces the total number of innovating firms in the industry, but not total innovation spending. Our findings suggest that reporting regulation imposes proprietary costs on innovative firms, especially smaller ones, thereby discouraging their innovation activity. At the same time, reporting regulation provides positive information spillovers to other firms (e.g., competitors, suppliers, and customers), especially larger ones, thereby concentrating innovation spending among a few large firms. Thus, financial reporting regulation has aggregate and distributional effects on corporate innovation that are important to consider by policy makers.

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

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