The real effects of accounting on innovation: evidence from ASC 606

I examine how Accounting Standards Codification (ASC) 606 affects R&D alliance formations and innovation in the drug development industry. ASC 606 alters revenue recognition timing and increases disclosure requirements. I document that firms dependent on R&D alliance revenues accelerate revenue recognition and expand revenue-related disclosures following ASC 606 adoption. These concurrent changes reduce information asymmetry, both between firms and between managers and investors, but only when increased disclosure accompanies accelerated recognition. Consistent with these net reductions in information asymmetry, affected firms raise more equity capital and increase R&D investment. Notably, these firms, which historically acted as technology providers (principals), form more R&D alliances as technology acquirers (partners). Consequently, they exhibit higher innovation output, measured by new patents and drug candidates. This study identifies a specific mechanism through which accounting standards can stimulate innovation: reduced information asymmetry that facilitates strategic R&D alliance formation.