The undesirable effect of audit quality: evidence from firm innovation

Lily Nguyen, Le Vu, Xiangkang Yin

Research output: Contribution to journalArticleResearchpeer-review

15 Citations (Scopus)

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.

Original languageEnglish
Article number100938
Number of pages21
JournalThe British Accounting Review
Volume52
Issue number6
DOIs
Publication statusPublished - Nov 2020

Keywords

  • Audit quality
  • Innovation
  • Patents
  • Citations
  • Financial reporting
  • Managerial myopia

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