The Bright Side of Discretionary Accruals: Evidence from Finance and Innovation

Abstract

We find cross‐sectional evidence that a financially constrained firm with patentable innovation opportunities can use discretionary accruals to reveal information about the firm's prospects and facilitate its financing activities. Specifically, using firms with patents in the National Bureau of Economic Research (NBER) patent database, we find that among financially constrained firms, higher discretionary accruals are associated with more capital being raised, greater research and development (R&D) expenditures, more patents, more patent citations, and better operating performance in the future. These positive relationships are driven by firms that raise equity capital, especially those that raise equity capital from employees.

Financial constraints, government subsidies, and corporate innovation

“…However, from a market-competition perspective, it is argued that the lack of access to financial resources is what encourages corporations to pursue market innovations [ 40 ]. These counter-intuitive events have been observed in developing countries such as China [ 41 ] and Vietnam [ 42 ]. The reason behind this might be the market-competition hypothesis, especially in the Chinese context: world-spotlight economic development energizes investments in innovation.…”

Executive resume information disclosure and corporate innovation: Evidence from China

“…The stronger the ability to attract high‐educated employees, the higher proportion of high‐educated employees. Second, following Hao and Li (2016), we adopt the SA index to measure financing constraints ( SA ). The smaller SA , the more serious financing constraints.…”

“…Financing constraints have been a concern of corporate innovation. Due to the high cost of innovation activities, innovative firms demand sufficient capital to invest in valuable projects (Hao & Li, 2016). According to the financing constraint theory, venture capital projects with positive net present value usually are abandoned when enterprises have high financing costs and insufficient internal cash flow.…”

“…First, from the perspective of ERID, we enrich the relevant research on the determinants of corporate innovation in China. Existing literature mainly focuses on the impact of financial information disclosure on corporate innovation in developed countries (Brown & Martinsson, 2019; Hao & Li, 2016; Park, 2018; Zhong, 2018). Our study further examines the impact of non‐financial information disclosure on corporate innovation in emerging markets.…”

“…Therefore, it is crucial to the success of innovation to clarify which information disclosure benefits offset costs. However, existing studies mainly use samples from developed countries to explore the role of financial information disclosure and mandatory patent disclosure in innovation (Brown & Martinsson, 2019;Hao & Li, 2016;Kim & Valentine, 2021;Park, 2018;Zhong, 2018). In addition to financial information, firms also transmit value-relevant information through large volumes of texts.…”