A recent academic study suggests that adopting a conservative accounting style can hinder a company’s ability to innovate.
The study, “Does Accounting Conservatism Impede Corporate Innovation?,” used patent citations as a proxy for innovation, and tracked the patent filings and citations of tens of thousands of U.S. public companies from 1976 to 2003.
The authors -- Gilles Hilary of INSEAD in France, Xin Chang and Jun Koo Kan of Nanyang Business School in Singapore, and Wenrui Zhan of Xiamen University in China -- write in the study, “We find that find that firms with a greater degree of accounting conservatism generate fewer patents and patent citations. … Moreover, the cash flows generated by the innovations in firms with more conservative accounting have shorter horizons.”
In an interview with Bloomberg Businessweek, co-author Hilary cited recognizing bad news right away and writing down losses immediately as the most common example of conservative accounting.
“The negative effects of accounting conservatism are more pronounced when firms’ need for innovation is higher,” the authors wrote, and when a company’s CEO’s compensation is more closely tied to accounting performance.
A working paper of the study is available on INSEAD’s Web site.