The Real Effects of Accounting on Innovation: Evidence from Asc 606
73 Pages Posted: 27 Nov 2023
Date Written: June 2023
Abstract
This study explores accounting information's role in forming R&D alliances and subsequent innovation. Specifically, I utilize the effect of the recent revenue recognition rule change, Accounting Standard Codification (ASC) 606, on drug development firms. ASC 606 allows managers to change revenue recognition timing and increases disclosure requirements. I first document that drug development firms dependent on R&D alliance revenue accelerate revenue recognition and concurrently disclose more about the recognition process following ASC 606 adoption. These changes affect the information asymmetry between firms, and between managers and investors. Consistent with a net decline in information asymmetry between managers and investors, these firms access more capital and increase R&D investments. Importantly, they form more R&D alliances consistent with the information asymmetry between firms also decreasing upon adopting ASC 606. In particular, firms that primarily provide technology in return for payments before ASC 606 become more likely to pay and acquire technology after ASC 606. Finally, I show that affected drug development firms exhibit higher innovation, proxied by the number of drug candidates and patents.
Keywords: Real effects, innovation, R&D Alliances, ASC 606, revenue recognition
JEL Classification: M41, O31, O32
Suggested Citation: Suggested Citation