Does Monitoring Impair Corporate Innovation? Evidence from the Audit Committee

Abstract

This study investigates whether and how audit committee monitoring mechanisms are associated with corporate innovation. Using panel data with the number of firm patents and citations as innovation output, we find that US public companies assigning members with financial expertise to audit committees, older and longer‐tenure members, and larger audit committees attenuate corporate innovation activities. Effective audit committees reduce the firm's risk tolerance and hence there are lower innovation outputs. Our results reveal that companies in less competitive industries or with more institutional investor holdings have lower innovation output, confirming that audit committees’ intense monitoring impairs firm innovation. To ensure robustness, we perform several endogeneity tests, including difference‐in‐differences regressions, lagged regressors and firm fixed effects, and also control for CEO incentives. We obtain consistent results. Finally, the study findings suggest that audit committees setting too strict supervision regulations could limit future corporate development.