Is Conservative Accounting Interfering with Business Innovation?

That's according to this article in Bloomberg/Businessweek:

Adopting a very conservative accounting style can have long-term effects on growth, says Gilles Hilary, associate professor of accounting & control at INSEAD. Hilary and co-authors Xin Chang and Jun Koo Kan of Nanyang Business School in Singapore and Wenrui Zhan of Xiamen University in China tracked more than 70,000 publicly traded U.S. companies from 1976 to 2006 and found that the more conservative a company was with its accounting procedures, the greater the impact it had on its ability to innovate. In the most common example of overly cautious accounting, companies “recognize bad news right away,” says Hilary, taking full writedowns on losses immediately rather than spreading the hit over a few years.

Well wait, before you take that to mean they are saying companies should go balls out on GAAP just to stay competitive:

To measure innovation, the scholars looked at patent filings and citations, R&D spending, and cash flow. Businesses with the most conservative accounting approach filed about 10 percent fewer patents and had fewer patent citations. They invested less in R&D, and, the study found, the cash flows generated by the fruits of this R&D tended to have shorter horizons. “For the very conservative firms, cash flows from patents are realized 1-2 years out. For the more liberal firms, the cash flow from patents is realized 5-6 years out,” Hilary adds. “It means you have safer companies, but fewer blockbuster innovations.”

More here.

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