The impact of value-relevant accounting rules on innovative activities

The purpose of this paper is to examine the impact of value-relevant accounting rules on corporate innovative activities. Using US data from 1972 to 2012, we find that value-relevant accounting rules help innovative companies to reduce R&D funding gaps, which is conducive to companies' innovative activities and potential long-term benefits. However, a higher risk premium is required by shareholders of innovative companies. Additionally, we find not only that R&D spending is more sensitive to future earnings variability as compared to that occurring commercial intellectual properties and physical assets, but we also find that managers contracted with long-term compensation plans have greater incentives to engage in innovative activities when value-relevant accounting rules set in. Overall, we provide evidence on alleviation of information asymmetry between innovative companies and their lenders when accounting information is more value relevant.