The undesirable effect of audit quality: Evidence from firm innovation |
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| Institution: | 1. Finance Discipline, UQ Business School, The University of Queensland, QLD, 4072, Australia;2. Centre for Global Business, Monash Business School, Monash University, VIC, 3800, Australia;3. Department of Finance, Deakin Business School, Deakin University, VIC, 3125, Australia;1. Manchester Metropolitan University Business School, Department of Accounting, Finance and Banking, Manchester, M15 6BH, United Kingdom;2. Lancaster University Management School, Department of Accounting and Finance, Lancaster, LA1 4YX, United Kingdom;1. Kate Tiedemann College of Business, University of South Florida-St. Petersburg, St. Petersburg, FL, 33701, United States;2. Manning School of Business, University of Massachusetts Lowell, Lowell, MA, 01854, United States;3. School of Management, University at Buffalo-SUNY, Buffalo, NY, 14260, United States;1. Department of Accounting, National Chengchi University, Taiwan;2. Department of Accounting, Soochow University, Taiwan;3. School of Management & Center for Accounting Studies, Xiamen University, China;1. Kent Business School – University of Kent, Park Wood Rd, Canterbury, CT2 7FS, UK;2. School of Accounting – RMIT University, 445, Swanston Street, 3000, VIC, Australia;3. Department of Economics and Management, University of Pisa, Via Cosimo Ridolfi, 10, 56124, Pisa, Italy;1. Management School, Jinan University, Guangzhou, China;2. Business School, University of Queensland, Australia;3. Center for Accounting, Finance and Institution, Business School, Sun Yat-sen University, Guangzhou, China |
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| Abstract: | This study examines whether and how audit quality affects a firm's technological innovation. Using a sample of 7,482 U.S. firms between 2000 and 2009, we demonstrate that high audit quality is associated with lower innovation output, measured by patent counts and patent citations. The effect remains valid after a series of tests for endogeneity issues, alternative measures of audit quality, and different subsamples. We also find that firms with high audit quality attract more non-dedicated institutional investors and financial analysts, who often exert excessive pressure on managers for short-term performance. These pressures, in turn, exacerbate managerial myopia and lead them to forgo investments in innovation. Our findings provide new insights into audit quality by showing its undesirable, most likely unintended, consequences. |
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| Keywords: | Audit quality Innovation Patents Citations Financial reporting Managerial myopia G34 M42 O31 |
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