Measuring the impact of financial transparency on corporate innovation: evidence from continental Europe and the UK

Abstract

Purpose The purpose of this paper is to explain how financial transparency affect the level of business innovation. The study is based on innovation level in European companies from STOXX Europe 600 index. The authors test three hypotheses about accounting conservatism, earning management and timeliness of financial information disclosure and their impact to the innovation level. Design/methodology/approach Data from a sample of 316 European firms spanning the years 2014–2020 are used to test the model using panel data and multiple regressions feasible generalized least squares (FGLS). The results withstand a battery of robustness tests, including other measures of earnings management and endogeneity tests including generalized method of moments (GMM) estimations and sub-sample analysis. Findings The regression findings show that accounting conservatism negatively influences the level of innovation of a company. This implies that accounting conservatism breeds myopia in managers. In addition, it is shown that discretionary accruals and timeliness of disclosure have a positive impact on corporate innovation levels. The impact of financial transparency can be shown to be stronger for firms in the UK, France and Germany, but not for other European firms. The study is relevant for the creative destruction and the resilience theories. Originality/value In the face of mixed results from studies linking financial transparency to corporate innovation levels, this study is designed to make one type of contribution: financial and accounting property as indicators of financial transparency may play a role in promoting or discouraging innovation.