۱- Introduction

۲- Related literature and hypothesis development

۳- Sample, data, and descriptive statistics

۴- Empirical analyses and regression results

۵- Endogeneity and identification strategies

۶- Robustness tests

۷- Concluding

References

Abstract

Firm innovation drives both firm competitiveness and economic growth. Constructing a novel firm-patent panel database from 29 countries, I find that transparency directly boosts innovative effort by reducing managerial career concerns. This effect operates through transparency’s implicit contracting role: it reduces the sensitivity of management turnover to poor innovative output. Transparency also increases innovative efficiency through its governance role in facilitating efficient allocation of R&D capital. Nonetheless, the benefit of transparency is fully offset in environments with greater proprietary cost. These findings illuminate the unique roles and mechanisms of transparency in promoting innovation incentives and outcomes.

Introduction

Understanding the economic consequences of a firm’s information environment (firm transparency) is an important theme in accounting research.1 One line of the inquiry points to financial reporting quality as a means of improving the efficiency of fixed capital investment (Biddle et al., 2009; Verdi, 2006). However, the literature provides little evidence regarding the link between transparency and firm innovation. This is a notable gap, given that innovation, unlike fixed capital investment, is a longterm intangible investment with high uncertainty and secrecy (Hall, 2002), but acts as a key driver of the real economy (Solow, 1957). My study aims to address this gap by examining the effects of firm transparency on innovative effort and efficiency and unraveling the mechanisms underlying these effects. Unlike fixed capital, which is prone to overinvestment, research and development (R&D) is typically underinvested, due to internal managerial incentives (Holmstrom, 1989) as well as external financial constraints (Brown et al., 2013; Hall, 2002). While studies suggest that better quality information can mitigate underinvestment of fixed capital by improving firms’ access to lower-cost external capital (e.g., Biddle et al., 2009), it is not clear whether financing alone will spur managerial innovative effort. In a multi-task setting, risk-averse managers have a natural incentive to forgo intangible R&D investments because they carry more risk than fixed capital investments (Kothari et al., 2002) and managers bear full career consequences if innovation fails for purely stochastic reasons (Hirshleifer, 1993; Kaplan and Minton, 2012). If explicit contracts cannot fully overcome the incentive problem, transparency can shield managers from undue career risks by providing principals detailed firm-specific information on managerial actions and helping them filter out noise from uncontrollable market risks (Bushman and Smith, 2001). In a multiperiod contracting relationship, managers in more transparent firms are thus encouraged to exert greater innovative effort. 2 This implicit contracting role of transparency predicts a positive relation between firm transparency and innovative effort (i.e., R&D investment).