FINANCIAL REPORTING QUALITY AND FIRM INNOVATION: EVIDENCE FROM CHINA

Financial reporting quality and innovation activities are important for firms and the whole economic system at large. This study investigates the relationship of financial reporting quality and firm innovation in the Chinese context. In this study an improved comprehensive accrual quality model is used to measure financial reporting quality. For firm innovation evaluation, the AHP method is used to assign weights to different indicators, and measures a firm's innovation efficiency from three critical perspectives: investment inputs, processes, and actual economic benefits. 1424 listed A-share firms from Shanghai Stock Market are chosen to test five hypotheses. It is found that there is a positive relationship between financial reporting quality and firm innovation in the Chinese context. The relationship is stronger when firms have a higher R&D intensity and when firms are from more competitive industries. The results also show that high quality financial reports will not always help firms to transform R&D investment to more and better innovation output. However, it helps firms' value creation.