14 Financial Accounting 9: Fair value accounting/ Intangible assets/innovations (FAR9)

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    The Innovation Consequences of Judicial Efficiency
    ( 2022) Shi, Tianshuo ; Kim, Jinhwan ; Verdi, Rodrigo
    We examine how judicial system efficiency shapes corporate innovation by exploiting the Patent Pilot Program enacted by Congress in 2011. Aiming to improve judicial efficiency of patent litigation, the pilot program allows judges with more relevant experience and expertise to preside over more patent cases in the 13 pilot district courts, thus effectively shortening the case durations. Using a difference-in-differences design, we find that an improvement in judicial efficiency significantly encourages innovation, especially explorative innovation in new technology domains or based on new knowledge. Judicial efficiency has more pronounced benefits on firms that are intensively exposed to litigation and firms with constrained resources for litigation. Our findings speak to the fundamental but underemphasized role of judicial efficiency in vitalizing the patent system.
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    Free Speech, the Right to Petition, and Corporate Innovation
    ( 2022) Griffin, Paul ; Hong, Hyun ; Jung, Boo Chun ; Ryou, Jiwoo
    Using the passage of state-level anti-SLAPP (strategic lawsuits against public participation) legislation as a plausible shock to free speech and the right to petition, we hypothesize and find that corporate innovation success increases following the passage of state anti-SLAPP laws. Our results suggest that the increase occurs through two channels: (i) a reduction in information asymmetry between the firm and outside investors on innovation investments and (ii) a reallocation of external capital to firms with higher growth prospects. Consistent with an informational channel, we find the increase is stronger for firms with an ex-ante lower quality information environment. Consistent with an external capital channel, our results also support the theory that outside capital providers are better able to distinguish between superior and inferior innovators in allocating their capital after the enactment of anti-SLAPP laws in a state. Our results hold under a battery of robustness tests. Overall, our results do not support the alternative view that firms use SLAPP lawsuits to stifle the release of public information contrary to their interests (e.g., proprietary information on trade secrets). Our study contributes to the accounting, law, and economics literatures by documenting a potentially unintended economic consequence for corporate innovation of state-level anti-SLAPP legislation.
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    What are the Innovation Consequences of Peer Firms’ Disclosures? Evidence from the EDGAR Implementation
    ( 2022) Chawla, Muskan
    This paper examines the real effects of accounting information dissemination on innovation. Broader dissemination of financial disclosures can provide timely information about the expected value of R&D investments and the commercialization potential of the innovation to follow-on inventors. Using the staggered adoption of the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system from 1993 to 1996 as a positive shock to information dissemination, I find that EDGAR implementation led to an increase in follow-on innovation as measured by patent citations. I also find the effects of EDGAR adoption to be stronger in industries where patents are important as well as for growth and profitable firms. Next, I find that firms decrease their R&D, capital expenditure, and patent filings after the adoption of EDGAR by technologically similar peers. The drop in investment activities can be explained by a decrease in duplicative research that translates into an increase in technological differentiation. Moreover, I find that there is an increase in both innovative efficiency and technological differentiation for profitable and growth firms. Last, I examine the aggregate effect of financial information dissemination and find an increase in innovative efficiency when a larger fraction of firms adopt EDGAR at the industry level. Overall, I document that accounting information plays an important role in facilitating follow-on innovation and influencing innovation-related activities at the firm and industry levels.
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    Intangible Capital and Information Asymmetry
    ( 2022) Kim-Gina, Jessica ; Friedman, Henry ; Chawla, Muskan
    This paper investigates how different types of intangible assets (organization and knowledge capital) affect insider trading gains and voluntary disclosure. Consistent with intangibles creating information asymmetry, we find that insider trading profits are positively associated with both organization and knowledge capital. Organization capital is also associated with lower voluntary disclosure and financial statement readability, while knowledge capital does not have a statistically significant impact. Moreover, the negative relation between organization capital and voluntary disclosure is stronger when industry competition is high. Lastly, we provide evidence on the compositions of organization and knowledge capital by examining how they map into specific types of intangible assets recognized in mergers and acquisitions. We find that target firms’ organization and knowledge capital are significantly associated with goodwill and contract-related intangibles, respectively.
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    Every Cloud Has a Silver Lining: Analysis of Negative Book Value Firms
    ( 2022) Huang, Rong ; Li, Xiaorong ; Shon, John ; Wang, Yuxuan
    Negative book value firms have become more prevalent in recent years, ranging from 0.41% of all Compustat firms in 1961 to 12.47% in 2016 with highest representations in the healthcare, telecommunication, and computer electronic industries. To examine why these negative book value firms are not liquidated, we investigate firms’ 1) current accounting practices, 2) future investment opportunities, and 3) narrative investment disclosures. We first document that negative book value firms adopting a more conservative accounting practice in the current period are less likely to be liquidated. Next, we find that the liquidation likelihood is lower for negative book value firms with higher levels of future intangible investments. Furthermore, we employ a machine-learning-based latent Dirichlet allocation (LDA) approach to measure investment-oriented firm disclosures and find a lower liquidation likelihood for negative book value firms disclosing more future investment narratives. Our evidence is robust to including reorganization firms and extending the length of the liquidation window. Overall, our study sheds light on why negative book value firms are not liquidated by providing evidence on firms’ current accounting practices and future investment opportunities.
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    Common Ownership and Goodwill Impairments
    ( 2022) Ye, Chunlai ; Yu, Lin-Hui
    This study explores whether common ownership affects companies’ decisions to record goodwill impairments. Consistent with the notion that common ownership is associated with effective monitoring, we find that companies monitored by common owners are more likely to record goodwill impairments when their assets are overstated. Further, our analysis indicates that the monitoring role of common ownership is more crucial for companies with high operational uncertainty and risk and for companies with less independent boards. We also find that the incentive to monitor companies is stronger for common owners with higher ownership market value and for those who invest in more companies in a single industry. Finally, given the severity of the COVID-19 crisis, we examine the impact on goodwill impairments. We find that companies monitored by common owners recorded goodwill impairments in a timelier manner during COVID-19 than companies without common ownership. Our findings are of interest to all capital market participants as they attempt to assess the broader implications of common ownership.  
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    Accounting for Cryptocurrency Value
    ( 2022) Liu, Yukun ; Tsyvinski, Aleh ; Wu, Xi
    Information pertaining to new addresses is highly value-relevant in the cryptocurrency market. Innovations to the number of new addresses explain 8% of the variations in cryptocurrency returns. Unlike traditional markets, we do not find pre- or post-drift around the release of new address information. The presence of strong market reactions at the release and the absence of drifts around it highlight the distinct features of cryptocurrencies and provide a benchmark case where information is released publicly and continuously. Lastly, we construct the price-to-new address ratios and find that they negatively predict future returns – a cryptocurrency value effect.
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    Patent Litigation Risk and Firm Boundaries
    ( 2022) Wu, Fan
    This paper examines how patent litigation risk shapes firms’ vertical boundaries. A vertically-integrated structure of a firm exacerbates the operational risk from patent lawsuits and grants patent asserters higher bargaining power by holding up the alleged firm. Consistent with this prediction, I find that firms with higher patent litigation risk tend to be more vertically separate. This association is mainly driven by firms that served as defendants of patent infringement in past patent lawsuits. Further identification strategies using instrumental variables and changes in legal institutions support the inference that litigation risk has a causal impact on firm boundaries. This negative effect of litigation risk on the degree of vertical integration is more pronounced when hold-up concerns are more acute and when coordination needs between supply chain parties are less important. Taken together, I provide evidence on how patent litigation risk affects the economic tradeoffs of firms’ boundary-expanding decisions.
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    CEO Social Capital and Value Relevance of Accounting Metrics
    ( 2022) Luehlfing, Michael ; McCumber, William ; Qiu, Huan
    Equity investors value CEO social capital when pricing firm equity. When CEO social capital is high, the value relevance of the book value of equity declines whereas the value relevance of earnings measures increases. Results are stronger for firms in high-tech industries where information asymmetries are higher. Social capital may be deconstructed into informational and reputational effects, and we report that social capital is a meaningful determinant of value relevance in both scenarios. Results are robust to alternative variable definitions, controls, and tests for endogeneity. The results strongly suggest that CEO social capital improves the information environment around firms, benefiting users of accounting information.
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    Value of Internally Generated Intangible Capital
    ( 2022) Iqbal, Aneel ; Rajgopal, Shivaram ; Srivastava, Anup ; Zhao, Rong
    Internally developed intangibles are not included in reported assets under U.S. Generally Accepted Accounting Principles. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis, conducted with book value of equity and assets. Recent studies attempt to overcome this deficiency by capitalizing selling, general, and administrative (SG&A) expenses, based on a one-size-fits-all mechanical rule of thumb that (i) treats a uniform 30% of SG&A as investments; and (ii) assumes the same life of SG&A investments across all industries. We propose a new method to calculate the value of internally generated intangibles. We estimate investment and maintenance portions of research and development (R&D) and MainSG&A (SG&A minus R&D), and their amortization rates, on an industry-year–specific basis. Our modified book value, inclusive of capitalized intangibles, exhibits greater association with future returns, investments, and bankruptcies, relative to as-reported book value and the book value estimated with mechanical capitalization. We provide a better estimate of book values of assets and equity for consumers of financial statements.