Real effects of financial reporting and disclosure on innovation

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.