Effect of accounting information manipulation on innovation: Evidence from China

Abstract

This study focuses on the real effect of accounting information manipulation. We find that accrual-based earnings management (AEM) impairs corporate innovation in China and the mechanisms include formal (i.e., financing) and informal (i.e., trust) channels. First, AEM impedes access to equity and debt financing, and government technological subsidies. Second, firms with AEM are considered less trustworthy, leading to less collaborative innovation. Furthermore, AEM leads to less R&D input and lower innovation efficiency. Our study reveals the mechanisms through which accounting information quality affects corporate innovation in emerging markets and demonstrates how accounting information affects economic outputs by influencing mutual trust.