Innovation and Earnings Quality: A Bayesian Analysis of Listed Firms in Vietnam

Abstract

Researchers have well documented the positive effects of innovation on growth and productivity. However, innovation might be associated with unexpected consequences, especially in term of earnings quality. In this paper, we employ the Bayesian linear regression to shed light on the relationship between innovation and earnings quality in the Vietnamese financial market. While other researches often use the Research and Development (R&D) expenditures, the number of patents and citations as measures of innovation, in this study, we use a new metric of innovation which is obtained from the Cobb-Douglas production function. Our research results indicate that firms with more innovations can lead to a decrease in earnings quality. Based on the findings, we recommend practitioners, especially investors and analysts should pay more attention to innovative firms when making investment decisions because these firms are more likely to participate in earnings management.

Keywords: Innovation; Earnings Quality; Bayesian Linear Regression

JEL Classification: G3