The Unintended Effect of the Regularized Government Accounting Supervision on Corporate Innovation

ABSTRACT Strengthening government accounting supervision is widely viewed as essential to modern governance and administrative capacity. Yet such interventions can entail real economic tradeoffs. Utilizing China's 2020 Regularized Government Accounting Supervision (RGAS) pilot policy as a quasi‐natural experiment, this study examines its impact on corporate innovation. Our findings indicate that firms in pilot regions experienced a significant decline in patent output compared to those in non‐pilot regions, with more pronounced effects among growth‐stage firms and those in non‐high‐tech industries. Mechanism analyses reveal that RGAS suppresses innovation primarily by reducing R&D investment and diminishing managerial optimism. Additional evidence suggests that firms’ adoption of artificial intelligence (AI) and higher analyst coverage can mitigate these adverse effects. These results highlight a potential trade‐off between regulatory oversight and innovative activities. The findings not only provide a significant addition to existing financial supervision theories in advanced economies, but also offer general insights for policymakers.