We investigate the impact of accounting discretion on managers' incentives to invest in innovative projects. Using a theoretical model in which a manager chooses between an innovative and a conventional project, we show that allowing accounting discretion incentivizes the manager to invest in the innovative project. This result derives from the intuition that accounting discretion reduces managerial myopia by insulating managers from short-term earnings pressure. We test the model empirically using the geographical distance to the Securities and Exchange Commission (SEC) office as the proxy for managers' ability to exercise accounting discretion and the closure of the SEC Seattle office as an exogenous shock to this ability. Consistent with the theoretical prediction, we find that firms located close to the Seattle office became more innovative after the office was closed compared to their counterparts located farther away from the office