Firm innovation drives both firm competitiveness and economic growth. Constructing a novel firm-patent panel database from 29 countries, I find that transparency directly boosts innovative effort by reducing managerial career concerns. This effect operates through transparency's implicit contracting role: it reduces the sensitivity of management turnover to poor innovative output. Transparency also increases innovative efficiency through its governance role in facilitating efficient allocation of R&D capital. Nonetheless, the benefit of transparency is fully offset in environments with greater proprietary cost. These findings illuminate the unique roles and mechanisms of transparency in promoting innovation incentives and outcomes.

This study examines whether and how financial statement comparability facilitates the dissemination of innovative knowledge between firms and stimulates the creation of new knowledge. Using cross-patent citations to track interfirm knowledge transfers, we find that comparability increases firms' incentives to learn from peers and create new patents that cite their peers' existing patents. The investigation into the mechanism reveals that comparability improves firms’ ability to estimate the monetary value of peer knowledge and predict their own financial benefits from knowledge acquisition. The impact of comparability is more pronounced when peer knowledge is more publicly accessible or of higher monetary value. Consequently, the acquired knowledge fosters follow-on innovation, enabling firms to produce more patents with greater economic significance. Evidence from two quasi-natural experiments suggests that our findings are plausibly causal. Overall, our study highlights the important role of accounting comparability in facilitating knowledge dissemination.

ABSTRACT The rise of stakeholder governance has triggered a wave of legal initiatives to strengthen the employee voice in firms. However, how managers trade off the competing objectives between shareholders and employees when making financial reporting decisions is not well understood. Exploiting staggered employment protection laws (EPLs) across 26 countries, we find that managers facing strong EPLs report more opaque earnings. Exploring the mechanism, we show that EPLs induce manager‐employee alliance: EPLs enhance employees' power to influence managers' private benefits and create an incentive for managers to treat employees more favorably, leading to an increase in manager‐employee reciprocal benefits. Further analysis shows that the alliance drives the increase in opacity following EPLs. Such alliance‐induced opacity impedes the ability of institutional shareholders to make timely adjustments to portfolio holdings in response to EPLs. Last, we identify several governance mechanisms that help break the manager‐employee nexus and restore reporting transparency. Overall, our study documents manager‐employee alliance as a potential cost of rigid labor laws and an important source of managerial reporting bias.