Financial Reporting Quality and Intangible Investments

79 Pages Posted: 13 Aug 2020 Last revised: 3 Jun 2022

See all articles by Heng Geng

Heng Geng

Victoria University of Wellington

Cheng Zhang

Victoria University of Wellington - Te Herenga Waka

Frank Zhou

University of Pennsylvania - The Wharton School

Date Written: June 1, 2020

Abstract

This paper presents theory and empirical evidence that greater financial reporting quality can incentivize myopic investments. Our model shows that greater financial reporting quality increases investor response to earnings and, in turn, the importance of earnings for the manager, elevating her incentive to invest myopically to improve earnings. Using the setting of Big N auditors' acquisitions of non-Big Ns, which increased investor response to earnings for the acquired client firms, we find evidence supporting myopic investments. Specifically, the acquired clients decrease intangible investments, particularly when (i) the increase in investor response to earnings is larger and (ii) the horizon of shareholders is shorter. The investment decrease is inefficient, as evidenced by reduced profitability, fewer exploratory innovations, and other measures.

Keywords: Financial reporting quality; Earnings response coefficient; Measurements; Myopia; Intangible investments; Patents; Real effects; Innovations

Suggested Citation

Geng, Heng and Zhang, Cheng and Zhou, Frank, Financial Reporting Quality and Intangible Investments (June 1, 2020). Available at SSRN: https://ssrn.com/abstract=3650784 or http://dx.doi.org/10.2139/ssrn.3650784

Heng Geng (Contact Author)

Victoria University of Wellington ( email )

PO Box 600
Wellington, 6140
New Zealand

Cheng Zhang

Victoria University of Wellington - Te Herenga Waka ( email )

P.O. Box 600
Wellington, 6140
New Zealand

Frank Zhou

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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