Real effects of financial reporting and disclosure on innovation

Abstract

This paper reviews the literature on the real effects of financial reporting and disclosure on corporate innovation, highlighting both the possible channels of influence and the potential challenges that researchers face when attributing causal effects. We discuss the concept of innovation, emphasising the specific characteristics that make investments in innovation difficult to report. We then provide a review of the nascent work relating disclosure to innovation, which we organise around three channels: financing, compensation and learning. Finally, we discuss recent efforts aimed at increasing the quality of corporate disclosures, including disclosures of firms' innovative activities. Throughout the paper, we highlight the trade-offs of disclosure (reduced information asymmetry and increased proprietary costs), which are particularly exacerbated in the context of corporate innovation.

Accounting for innovations in value management of companies in the context of globalization

“…If an enterprise innovates but does not create an intangible asset, such costs are characterized as a contribution to internally generated goodwill. Internally generated goodwill is not recognized as an asset because it is not an identifiable resource (that is, it is not separable and does not derive from contractual or other legal rights) that is controlled by the entity and that can be measured reliably at cost [3,8]. Internally generated goodwill is an important part of a company's value management.…”

“…The real impact of financial reporting on the disclosure of information about the company's innovation is highlighted by Simpson A. and Tamayo A. [3] and points to the difficulties in reporting on investment in innovation. Given the set of characteristics of the company's innovation activities, the disclosure of information about innovations can be carried out in three sections: financing, compensation and training.…”

‘Real effects of financial reporting and disclosure on innovation’– a practitioner view

“…It is also good to see a focus in an academic paper on how reporting might change. Simpson and Tamayo (2020) discuss the work of the International Accounting Standards Board (IASB) on management commentary and non-GAAP (Generally Accepted Accounting Principles) measures, which I will come back to shortly. I think the sign of a good paper is to get people to think, and it has certainly had that effect on me.…”

“…He has done innovation in the past and is a successful entrepreneur, although his current project is a long way from reaching the public domain. I was interested that Simpson and Tamayo (2020) differentiate between private companies and public companies in terms of their structure and how reporting might influence things. It is obviously very much a private company focus from Justin's perspective.…”

“…Questions of disclosure, where the disclosure should be and is it mandatory, is it audited, questions of asset recognition, do we capitalise Research & Development (R&D), do we expense it, what about the volatility issue, what about impairment, how should we measure, should it be cost or fair valueall of these things become much more important when we scale up to these public companies. Simpson and Tamayo (2020) suggest that innovation is a key driver of firm value. It is a driver of survival, and I absolutely agree that when investors are looking at companies, innovation and the product pipeline, are key considerations.…”