The Innovation and Reporting Consequences of Financial Regulation for Young Life-Cycle Firms

Journal of Accounting Research, Volume 60, Issue 1

Posted: 3 Apr 2022

See all articles by Abigail M. Allen

Abigail M. Allen

Brigham Young University - Marriott School

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

Kristen Valentine

University of Georgia

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2022

Abstract

Firm life-cycle stage reflects a firm's current strategic direction toward exploration independent of age or size. We provide evidence that young life-cycle firms are particularly vulnerable to negative innovation consequences from financial regulation but do not appear to experience any compensating financial reporting quality (FRQ) benefits. Using a generalized difference-in-differences design around Sarbanes Oxley Act of 2002 (SOX), we document a significant reduction in both research and development (R&D) spending and innovation outputs for young life-cycle stage firms after regulation. Declines in innovation manifest both from the diversion of scarce resources and from the imposition of an organizational culture mismatched to the pursuit of explorative innovation, resulting in a less generalizable and less diversified patent portfolio. However, we find no evidence that improvements to FRQ materialize to offset these costs. Event study analyses suggest that this negative impact was expected by market participants, and postregulation returns confirm this expectation.

Keywords: firm life-cycle; innovation; explorative innovation, R&D; financial regulation; corporate governance; financial reporting quality

JEL Classification: G38, L51, M40, M41, M48, O32

Suggested Citation

Allen, Abigail M. and Lewis-Western, Melissa Fay and Valentine, Kristen, The Innovation and Reporting Consequences of Financial Regulation for Young Life-Cycle Firms (March 1, 2022). Journal of Accounting Research, Volume 60, Issue 1, Available at SSRN: https://ssrn.com/abstract=4072843

Abigail M. Allen (Contact Author)

Brigham Young University - Marriott School ( email )

Provo, UT
United States

Melissa Fay Lewis-Western

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

Kristen Valentine

University of Georgia ( email )

Athens, GA 30602
United States

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