Rajan and Zingales (1998, 2003) argue that good accounting standards and disclosure rules reduce the wedge between the cost of internal and external funds and enhance growth. We test the causal link between financial reporting and growth using a quasi-natural experiment – the mandatory adoption of International Financial Reporting Standards (IFRS) across the world – and examine its effect on innovation, a corporate activity that directly drives economic growth. Our Difference-in-Differences (DiD) results suggest that improved financial reporting leads to more innovation in the long run – it generates more patents and patents with higher impact. We also find that the positive effect of improved financial reporting on innovation is more pronounced among industries with higher dependence on external financing, consistent with the role of good financial reporting in reducing the cost of external financing. In addition, we find results consistent with the managerial learning hypothesis that managers are able to learn from the stock market after improved financial transparency. Our paper sheds new light on the real effects of financial reporting.
Xi is currently Associate Professor of Accounting at the London School of Economics. Before joining the LSE, she worked at Temple University and the Wharton School. She earned her PhD in accounting from the London Business School. Xi studies financial reporting and disclosure, corporate social responsibility, shareholder activism, debt contracting with a focus on the economic effects of financial reporting transparency in international capital markets. Her papers have been published in the Journal of Accounting Research, The Accounting Review, Review of Accounting Studies, and Review of Financial Studies. Her research papers have won several best paper awards and the Moskowitz Prize for Socially Responsible Investing. Her research has also been cited by various social media, including Harvard Law School Forum on Corporate Governance and Financial Regulation, Financial Times, Wall Street Journal, Pension & Investments, among others.
This seminar is organised in association with the Cambridge Corporate Governance Network (CCGN).