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Innovation Under Pressure

Published online by Cambridge University Press:  09 May 2024

Heitor AlmeidaOpen the ORCID record for Heitor Almeida[Opens in a new window],
Vyacheslav FosOpen the ORCID record for Vyacheslav Fos[Opens in a new window],
Po-Hsuan HsuOpen the ORCID record for Po-Hsuan Hsu[Opens in a new window],
Mathias KronlundOpen the ORCID record for Mathias Kronlund[Opens in a new window] and
Kevin TsengOpen the ORCID record for Kevin Tseng[Opens in a new window]
Heitor Almeida*
Affiliation:
University of Illinois at Urbana-Champaign Gies College of Business and NBER
Vyacheslav Fos
Affiliation:
Boston College Carroll School of Management, NBER, Centre for Economic Policy Research, and European Corporate Governance Institute fos@bc.edu
Po-Hsuan Hsu
Affiliation:
National Tsing Hua University College of Technology Management pohsuanhsu@mx.nthu.edu.tw
Mathias Kronlund
Affiliation:
Tulane University Freeman School of Business mkronlund@tulane.edu
Kevin Tseng
Affiliation:
Chinese University of Hong Kong School of Business and National Taiwan University College of Management kevintseng@cuhk.edu.hk
*
halmeida@illinois.edu (corresponding author)
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Abstract

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Firms become more efficient at innovation activities when they face pressure to meet earnings per share (EPS) targets using stock repurchases. Using a regression-discontinuity framework, we find that incentives to engage in “EPS-motivated buybacks” are followed by more citations and higher values for firms’ new patents. We trace these effects to improved allocation of R&D resources and a greater focus on novel innovation. The positive effects are concentrated among ex ante “innovation-efficient” firms that achieve better patenting outcomes after reorganizing (but not cutting) their R&D investments. Our findings illustrate that short-term earnings pressure can act through a free cash flow channel that motivates more efficient spending.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 60 , Issue 5 , August 2025, pp. 2088 - 2120
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (http://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We thank two anonymous referees, Alex Coad, Peter Cziraki (FIRS discussant), Mariassunta Giannetti, Jarrad Harford (the editor), Ning Jia (CICF discussant), Hunghua Pan, Henry Servaes, Kelly Shue, Anjan Thakor, Yanzhi Wang, Hong Wu, Tong Zhou, and seminar and conference participants at the China International Conference in Finance, Financial Intermediation Research Society annual meeting, Fudan University, National Chengchi University, National Tsing Hua University, the 8th Taiwan Symposium on Innovation Economics and Entrepreneurship, the 28th PBFEAM conference, and the University of Alabama for helpful discussions. Hsu acknowledges the Ministry of Education and the Ministry of Science and Technology in Taiwan for financial support (Yushan Fellow Program and MOST109-2628-H-007-001-MY4). Tseng would like to acknowledge research support from the Ministry of Science and Technology, Taiwan (112-2628-H-002-010-MY2), and from the Ministry of Education, Taiwan (113L900201).

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