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Accounting Comparability and Corporate Innovative Efficiency

Research output: Contribution to journalJournal article

E-pub ahead of print
<mark>Journal publication date</mark>1/12/2019
<mark>Journal</mark>The Accounting Review
Publication statusE-pub ahead of print
Early online date1/12/19
Original languageEnglish

Abstract

We predict that a firm's greater accounting comparability with its industry peers facilitates its learning from those peer firms' research and development (R&D) investments, allowing that firm to have greater innovative efficiency. We estimate accounting comparability using pro-forma capitalized R&D earnings that link lagged R&D expenditures to future profitability employing the Almon (1965) distributed lag model. We find that greater accounting comparability leads to enhanced ability to predict future cash flows generated by R&D investments of peer firms. In the cross-section, we observe the relation between accounting comparability and innovative efficiency is stronger if peer firms exhibit higher accounting (accrual) quality and are themselves successful innovators. In sum, this study shows that a shared qualitative characteristic of accounting, namely accounting comparability, is positively associated with innovative efficiency.