Public Audit Oversight and Corporate Innovation: International Evidence

Abstract

Exploiting the staggered establishment of public audit oversight boards (POBs) worldwide and employing a difference-in-differences methodology, we find that patents and patent citations increase significantly following the implementation of public audit oversight. This is especially so in client firms whose auditors have greater industry expertise. Moreover, we find evidence consistent with the establishment of POBs promoting innovation activities by relaxing firms’ financial constraints, mitigating agency conflicts between managers and shareholders, and encouraging CEO risk-taking. Additional analyses show that after the establishment of national POBs, firms’ patents involve more new knowledge, are cited by a larger number of other firms, and have a more positive contribution to firm value. Overall, we document that the establishment of public audit oversight programs positively affects corporate innovation outcomes and explain the potential economic mechanisms in the international setting.

Keywords: Public audit oversight; Audit Quality; Financial Reporting; Innovation Output

JEL Classification: M42; M48