Innovation Input and Firm Value: Based on the Moderating Effect of Internal Control

Using the data of Chinese A-share listed firms with non-zero innovation investment between 2007 and 2017, this paper links the value relevance of innovation investment with internal control from the perspective of operating performance and market value, respectively. This paper empirically verifies that internal control significantly increases the value relevance of innovation input, that is, the better the internal control, the more innovation investment contributes to the operating performance and market value of a firm. Then, based on the potential mechanisms of alleviating agency problems and conducting better risk management, further investigation in this paper also indicates that internal control's moderating effect on the value relevance of innovation input is more prominent for firms with relatively more severe agency problems and for expensed R&D expenditure which represents the part of innovation investment with higher uncertainty.

Automated summary

This paper examines the value relevance of innovation investment in Chinese A-share listed firms and its relationship with internal control. The study finds that better internal control leads to a stronger value relevance of innovation investment, indicating that internal control plays a crucial role in the operating performance and market value of a firm. Additionally, the study suggests that internal control has a more significant moderating effect on firms with severe agency problems and on the expensed R&D expenditure with higher uncertainty, suggesting the potential mechanisms of alleviating agency problems and conducting better risk management.