The Undesirable Effect of Audit Quality: Evidence from Firm Innovation

49 Pages Posted: 31 Jul 2020

See all articles by Lily Nguyen

Lily Nguyen

The University of Queensland - UQ Business School

Le Vu

Centre for Global Business, Monash Business School, Monash University

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: 2020

Abstract

This study examines whether and how audit quality affects a firm’s technological innovation. Using a sample of 7,482 U.S. firms between 2000 and 2009, we demonstrate that high audit quality is associated with lower innovation output, measured by patent counts and patent citations. The effect remains valid after a series of tests for endogeneity issues, alternative measures of audit quality, and different subsamples. We also find that firms with high audit quality attract more non-dedicated institutional investors and financial analysts, who often exert excessive pressure on managers for short-term performance. These pressures, in turn, exacerbate managerial myopia and lead them to forgo investments in innovation. Our findings provide new insights into audit quality by showing its undesirable, most likely unintended, consequences.

Keywords: audit quality, innovation, financial reporting, managerial myopia

JEL Classification: G34, M42, O31

Suggested Citation

Nguyen, Lily and Vu, Le and Yin, Xiangkang, The Undesirable Effect of Audit Quality: Evidence from Firm Innovation (2020). British Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3643681

Lily Nguyen

The University of Queensland - UQ Business School ( email )

St Lucia
Brisbane, Queensland 4072
Australia

Le Vu (Contact Author)

Centre for Global Business, Monash Business School, Monash University ( email )

Monash Business School
Monash University
Clayton, VIC 3800
Australia

Xiangkang Yin

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
66
Abstract Views
720
rank
419,972
PlumX Metrics