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To Inspire Blockbuster Ideas and Innovation, Start With the Accountants

To measure innovation, scholars looked at patent filings and citations, R&D spending and cash flow

To measure innovation, scholars looked at patent filings and citations, R&D spending and cash flow Photograph by Jeff Minton/Gallery Stock

If it’s true that going public can having a chilling effect on innovation, it’s time to start asking who might be responsible for that innovation deficit. According to one new study, the blame lies with fiscally conservative financial officers and cautious chief executives.

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.