Yuan Xie examines the relation between innovation and financial reporting quality (FRQ) and the implications of audit quality for this relation
Associate professor Yuan Xie co-authored “Innovation, Financial Reporting Quality, and Audit Quality,” which was published in the October 2018 edition of the Review of Quantitative Finance and Accounting. The authors observed a negative relation between innovation and financial reporting quality. This result is consistent with greater earnings management at higher innovation firms. Managers at firms with higher innovation likely can do this because their information is less transparent. In turn, managers can act more opportunistically. However, audit quality can constrain managers’ opportunities to manage earnings. The authors conclude that audit quality does hinder the negative relation between financial reporting quality and innovation.