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The economic effect of accounting information quality (AIQ) is a classic theme in the accounting field. A large amount of the previous literature examines the impact of AIQ on corporate investment efficiency and reports that high-quality accounting information can promote corporate investment efficiency. Examples include work by Healy and Palepu (2001), Biddle and Hilary (2006), Biddle et al. (2009), Chen et al. (2011), Ramalingegowda et al. (2013), and Dou et al. (2019). However, there is little literature on the impact of AIQ on the efficiency of corporate innovation investment. Corporate innovation investment is a special type of investment. Compared with general physical capital investment, corporate innovation investment is characterized by a large investment amount, a long cycle, high risk, an uncertain cash flow, and other characteristics (Holmström, 1989), as well as natural confidentiality. Whether AIQ has an effect on the efficiency of corporate innovation investment needs further study.
This paper examines the relationship between AIQ and the efficiency of company investment in innovation. We study this problem mainly for the following reasons. First, the capital market is an important place for allocating company innovation resources as well as an important factor influencing company investment in innovation. The existing literature suggests that company innovation is a source of relative power helping to ensure a country’s economic growth (Romer, 1990) as well as its competitive advantage (Solow, 1957). Innovation also serves as a driving force behind industrial transformation and modernization, which fuel core competitiveness to help maintain a company’s sustainable and healthy development (Rosenberg, 2004). However, it has also been shown that innovation is difficult for companies to stimulate and cultivate (He et al., 2021; Hsu et al., 2014). The innovation process is not only time-consuming, specific, and unpredictable, but it is also prone to failure (Holmström, 1989). However, the uncertainty inherent to innovation activities, information asymmetry, large required amounts of investment, and other company characteristics can easily lead to a lack of innovation capital (Acharya & Xu, 2017), leaving industry experts and researchers unsure about how to better promote corporate innovation. Some scholars have found that capital markets play an important role in promoting innovation; they can boost the efficiency of firms’ investments in innovation in four ways: (1) serve as a source of finance (Brown et al., 2012; Rajan, 2012), (2) evaluate and screen innovative investment projects (Hsu et al., 2014), (3) share risk (Levine, 2005), and (4) alleviate agency problems and motivate and supervise managers (Hall & Lerner, 2010). In this body of existing research, the capital market is an important unifying mechanism that affects corporate innovation. Second, information asymmetry exists in the capital market. Information asymmetry can and often will lead directly to the problems of adverse selection and moral hazards. Adverse selection increases financing costs, which ultimately imposes financing constraints on the company, which in turn result in company underinvestment in innovation. Moral hazards produce agency problems, affecting the selection of innovation projects, which leads to company overinvestment in innovation. Therefore, information asymmetry can cause investment in innovation to deviate from the optimal level, creating innovation investment inefficiency for the company. Accordingly, inefficient innovation investment is mainly divided into two forms: underinvestment and overinvestment in innovation, both of which result in a suboptimal level of innovation investment expenditure. Both scenarios negatively impact corporate innovation and create further disruptions in the capital market’s ability to optimize the allocation of innovative resources. Therefore, information asymmetry in the capital market negatively affects the efficiency of company investment in innovation. Finally, high-quality accounting information can help alleviate information asymmetry in the capital market. Specifically, improved accounting information can alleviate information asymmetry between the company and external investors, reducing the company’s financing constraints and investment shortages. It can also alleviate the information asymmetry between shareholders and managers, reducing agency costs and overinvestment (Chen et al., 2011; Houcine, 2017; Verdi, 2006).