Does Accounting Conservatism Impede Corporate Innovation?

We examine the impact of accounting conservatism on corporate innovation. We find that firms with a higher level of accounting conservatism generate fewer patents and patent citations. They invest less in R&D activities but our results hold after controlling for this lower R&D activity. Moreover, the cash-flows associated with innovation in firms with more conservative accounting are lower and have shorter horizons. The negative effects of accounting conservatism on innovation are more pronounced when firms’ need for innovation is higher, when their product development cycle is longer, when their managers face higher pay sensitivity to accounting performance, or when their managers are more myopic. Overall, these results suggest that accounting conservatism curbs corporate innovation through managerial myopia.