Hostname: page-component-5c6d5d7d68-vt8vv Total loading time: 0.001 Render date: 2024-08-15T19:12:07.891Z Has data issue: false hasContentIssue false
  • English
  • Français

Innovation Under Pressure

Published online by Cambridge University Press:  09 May 2024

Heitor Almeida Open the ORCID record for Heitor Almeida [Opens in a new window] ,
Vyacheslav Fos Open the ORCID record for Vyacheslav Fos [Opens in a new window] ,
Po-Hsuan Hsu Open the ORCID record for Po-Hsuan Hsu [Opens in a new window] ,
Mathias Kronlund Open the ORCID record for Mathias Kronlund [Opens in a new window]  and
Kevin Tseng Open 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)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , First View , pp. 1 - 33
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).

References

Aghion, P.; Van Reenen, J.; and Zingales, L.. “Innovation and Institutional Ownership.” American Economic Review, 103 (2013), 277–304.CrossRefGoogle Scholar
Almeida, H.; Ersahin, N.; Fos, V.; Irani, R. M.; and Kronlund, M.. “Do Short-Term Incentives Affect Long-Term Productivity?” Working Paper, European Corporate Governance Institute (2020).CrossRefGoogle Scholar
Almeida, H; Fos, V.; and Kronlund, M.. “The Real Effects of Share Repurchases.” Journal of Financial Economics, 119 (2016), 168–185.CrossRefGoogle Scholar
Almeida, H.; Hsu, P. H.; L, D; and Tseng, K.. “More Cash, Less Innovation: The Effect of the American Jobs Creation Act on Patent Value.” Journal of Financial and Quantitative Analysis, 56 (2021), 1–28.CrossRefGoogle Scholar
Amore, M. D.; Schneider, C.; and Žaldokas, A.. “Credit Supply and Corporate Innovation.” Journal of Financial Economics, 109 (2013), 835–855.CrossRefGoogle Scholar
Atanassov, J. “Do Hostile Takeovers Stifle Innovation? Evidence from Antitakeover Legislation and Corporate Patenting.” Journal of Finance, 68 (2013), 1097–1131.CrossRefGoogle Scholar
Balsmeier, B.; Fleming, L.; and Manso, G.. “Independent Boards and Innovation.” Journal of Financial Economics, 123 (2017), 536–557.CrossRefGoogle Scholar
Bereskin, F. L.; Hsu, P. H.; and Rotenberg, W.. “The Real Effects of Real Earnings Management: Evidence from Innovation.” Contemporary Accounting Research, 35 (2018), 525–557.CrossRefGoogle Scholar
Bernstein, S. “Does Going Public Affect Innovation?” Journal of Finance, 70 (2015), 1365–1403.CrossRefGoogle Scholar
Bernstein, S. “The Effects of Public and Private Equity Markets on Firm Behavior.” Annual Review of Financial Economics, 14 (2022), 295–318.CrossRefGoogle Scholar
Bloom, N.; Schankerman, M.; and Van Reenen, J.. “Identifying Technology Spillovers and Product Market Rivalry.” Econometrica, 81 (2013), 1347–1393.Google Scholar
Bushee, B. J. “The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305–333.Google Scholar
Chemmanur, T. J., and Tian, X.. “Do Antitakeover Provisions Spur Corporate Innovation? A Regression Discontinuity Analysis.” Journal of Financial and Quantitative Analysis, 53 (2018), 1163–1194.CrossRefGoogle Scholar
Chen, X.; Cheng, Q.; Lo, A. K.; and Wang, X.. “CEO Contractual Protection and Managerial Short-Termism.” Accounting Review, 90 (2015), 1871–1906.CrossRefGoogle Scholar
Chen, T.; Harford, J.; and Lin, C.. “Do Analysts Matter for Governance? Evidence from Natural Experiments.” Journal of Financial Economics, 115 (2015), 383–410.CrossRefGoogle Scholar
Christensen, C. M. The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail. Boston, MA: Harvard Business School Press (1997).Google Scholar
Custódio, C.; Ferreira, M. A.; and Matos, P.. “Generalists Versus Specialists: Lifetime Work Experience and Chief Executive Officer Pay.” Journal of Financial Economics, 108 (2013), 471–492.CrossRefGoogle Scholar
Darrough, M., and Rangan, S.. “Do Insiders Manipulate Earnings When They Sell Their Shares in an Initial Public Offering?” Journal of Accounting Research, 43 (2005), 1–33.CrossRefGoogle Scholar
de Rassenfosse, G., and Jaffe, A. B.. “Econometric Evidence on the Depreciation of Innovations.” European Economic Review, 101 (2018), 625–642.CrossRefGoogle Scholar
Dechow, P. M., and Sloan, R. G.. “Executive Incentives and the Horizon Problem: An Empirical Investigation.” Journal of Accounting and Economics, 14 (1991), 51–89.CrossRefGoogle Scholar
Dell, M. “Going Private Is Paying Off for Dell.” Wall Street Journal, Nov. 24, 2014, https://www.wsj.com/articles/michael-dell-going-private-is-paying-off-for-dell-1416872851 (2014).Google Scholar
Deng, Z.; Lev, B.; and Narin, F.. “Science and Technology as Predictors of Stock Performance.” Financial Analysts Journal, 55 (1999), 20–32.CrossRefGoogle Scholar
Derrien, F.; Kecskés, A.; and Thesmar, D.. “Investor Horizons and Corporate Policies.” Journal of Financial and Quantitative Analysis, 48 (2013), 1755–1780.CrossRefGoogle Scholar
Dichev, I. D.; Graham, J. R.; Harvey, C. R.; and Rajgopal, S.. “Earnings Quality: Evidence from the Field.” Journal of Accounting and Economics, 56 (2013), 1–33.CrossRefGoogle Scholar
Dimon, J., and Buffett, W. E.. “Short-Termism Is Harming the Economy.” Wall Street Journal, June 6, 2018, https://www.wsj.com/articles/short-termism-is-harming-the-economy-1528336801 (2018).Google Scholar
Edmans, A.; Fang, V. W.; and Lewellen, K. A.. “Equity Vesting and Investment.” Review of Financial Studies, 30 (2017), 2229–2271.CrossRefGoogle Scholar
Gao, H.; Hsu, P. H.; and Li, K.. “Innovation Strategy of Private Firms.” Journal of Financial and Quantitative Analysis, 53 (2018), 1–32.CrossRefGoogle Scholar
Gentry, R. J., and Shen, W.. “The Impacts of Performance Relative to Analyst Forecasts and Analyst Coverage on Firm R&D Intensity.” Strategic Management Journal, 34 (2013), 121–130.CrossRefGoogle Scholar
Giannetti, M., and Yu, X.. “Adapting to Radical Change: The Benefits of Short-Horizon Investors.” Management Science, 67 (2021), 4032–4055.CrossRefGoogle Scholar
Graham, S. J. H.; Hancock, G.; Marco, A. C.; and Myers, A. F.. “The USPTO Trademark Case Files Dataset: Descriptions, Lessons, and Insights.” Journal of Economics & Management Strategy, 22 (2013), 669–705.Google Scholar
Graham, J. R.; Harvey, C. R.; and Rajgopal, S.. “The Economic Implications of Corporate Financial Reporting.” Journal of Accounting and Economics, 40 (2005), 3–73.CrossRefGoogle Scholar
Griliches, Z. “Market Value, R&D, and Patents.” Economics Letters, 7 (1981), 183–187.CrossRefGoogle Scholar
Griliches, Z. “R&D and Productivity: Measurement Issues and Econometric Results.” Science, 237 (1987), 31–35.CrossRefGoogle ScholarPubMed
Griliches, Z. “Patent Statistics as Economic Indicators: A Survey.” Journal of Economic Literature, 28 (1990), 1661–1707.Google Scholar
Gunny, K. A. “The Relation Between Earnings Management Using Real Activities Manipulation and Future Performance: Evidence from Meeting Earnings Benchmarks.” Contemporary Accounting Research, 27 (2010), 855–888.CrossRefGoogle Scholar
Guo, B.; Pérez-Castrillo, D.; and Toldrà-Simats, A.. “Firms’ Innovation Strategy Under the Shadow of Analyst Coverage.” Journal of Financial Economics, 131 (2019), 456–483.CrossRefGoogle Scholar
Hackbarth, D.; Rivera, A.; and Wong, T. Y.. “Optimal Short-Termism.” Management Science, 68 (2022), 6477–6505.CrossRefGoogle Scholar
Hall, B. H. “The Stock Market’s Valuation of R&D Investment During the 1980’s.” American Economic Review, 83 (1993), 259–264.Google Scholar
Hall, B. H.; Griliches, Z.; and Hausman, J. A.. “Patents and R and D: Is There a Lag?” International Economic Review, 27 (1986), 265–283.CrossRefGoogle Scholar
Hall, B. H.; Jaffe, A.; and Trajtenberg, M.. “Market Value and Patent Citations.” RAND Journal of Economics, (2005), 16–38.Google Scholar
Harhoff, D.; Narin, F.; Scherer, F. M.; and Vopel, K.. “Citation Frequency and the Value of Patented Inventions.” Review of Economics and Statistics, 81 (1999), 511–515.CrossRefGoogle Scholar
He, J. J., and Tian, X.. “The Dark Side of analyst Coverage: The Case of Innovation.” Journal of Financial Economics, 109 (2013), 856–878.CrossRefGoogle Scholar
Hirshleifer, D.; Hsu, P. H.; and Li, D.. “Innovative Efficiency and Stock Returns.” Journal of Financial Economics, 107 (2013), 632–654.CrossRefGoogle Scholar
Hribar, P.; Jenkins, N. T.; and Johnson, W. B.. “Stock Repurchases as an Earnings Management Device.” Journal of Accounting and Economics, 41 (2006), 3–27.CrossRefGoogle Scholar
Hsu, P.-H.; Lee, H.-H.; Peng, S. C.; and Long, Y.. “Natural Disasters, Technology Diversity, and Operating Performance.” Review of Economics and Statistics 100 (2018), 619–630.CrossRefGoogle Scholar
Hsu, P.-H.; Li, D.; Li, Q.; Teoh, S. H.; and Tseng, K.. “Valuation of New Trademarks.” Management Science, 68 (2022), 257–279.Google Scholar
Jensen, M. C. “Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.” American Economic Review, 76 (1986), 323–329.Google Scholar
Jensen, M. C. “The Modern Industrial Revolution, Exit, and the Failure of Internal Control Systems.” Journal of Finance, 48 (1993), 831–880.CrossRefGoogle Scholar
Kamien, M. I., and Schwartz, N. L.. “Market Structure and Innovation: A Survey.” Journal of Economic Literature, 13 (1975), 1–37.Google Scholar
Katila, R., and Ahuja, G.. “Something Old, Something New: A Longitudinal Study of Search Behavior and New Product Introduction.” Academy of Management Journal, 45 (2002), 1183–1194.CrossRefGoogle Scholar
Kedia, S., and Philippon, T.. “The Economics of Fraudulent Accounting.” Review of Financial Studies 22 (2009), 2169–2199.CrossRefGoogle Scholar
Kogan, L.; Papanikolaou, D.; Seru, A.; and Stoffman, N.. “Technological Innovation, Resource Allocation, and Growth.” Quarterly Journal of Economics, 132 (2017), 665–712.CrossRefGoogle Scholar
Kortum, S. S., and Lerner, J.. “Does Venture Capital Spur Innovation?” NBER Working Paper No. 6846 (1998).CrossRefGoogle Scholar
Kraft, A. G.; Vashishtha, R.; and Venkatachalam, M.. “Frequent Financial Reporting and Managerial Myopia.” Accounting Review, 93 (2018), 249–275.CrossRefGoogle Scholar
Ladika, T., and Sautner, Z.. “Managerial Short-Termism and Investment: Evidence from Accelerated Option Vesting.” Review of Finance, 24 (2020), 305–344.Google Scholar
Lerner, J. “The Importance of Patent Scope: An Empirical Analysis.” RAND Journal of Economics, (1994), 319–333.CrossRefGoogle Scholar
Lerner, J.; Sorensen, M.; and Strömberg, P.. “Private Equity and Long-Run Investment: The Case of Innovation.” Journal of Finance, 66 (2011), 445–477.CrossRefGoogle Scholar
Lerner, J., and Wulf, J.. “Innovation and Incentives: Evidence from Corporate R&D.” Review of Economics and Statistics, 89 (2007), 634–644.CrossRefGoogle Scholar
Lev, B. Intangibles: Management, Measurement, and Reporting. Washington, DC: Brookings Institution Press (2001).Google Scholar
Meulbroek, L. K.; Mitchell, M. L.; Mulherin, J. H.; Netter, J. M.; and Poulsen, A. B.. “Shark Repellents and Managerial Myopia: An Empirical Test.” Journal of Political Economy, 98 (1990), 1108–1117.CrossRefGoogle Scholar
Mukherjee, A.; Singh, M.; and Žaldokas, A.. “Do Corporate Taxes Hinder Innovation?” Journal of Financial Economics 124 (2017), 195–221.CrossRefGoogle Scholar
Nasirov, S. “Trademark Value Indicators: Evidence from the Trademark Protection Life-Cycle in the US Pharmaceutical Industry.” Research Policy, 49 (2020), 103929.CrossRefGoogle Scholar
Pakes, A., and Griliches, Z.. “Patents and R&D at the Firm Level: A First Look.” In R & D, Patents, and Productivity, Griliches, Z., ed. Chicago, IL: University of Chicago Press (1984).Google Scholar
Pandit, S.; Wasley, C. E.; and Zach, T.. “The Effect of Research and Development (R&D) Inputs and Outputs on the Relation Between the Uncertainty of Future Operating Performance and R&D Expenditures.” Journal of Accounting, Auditing & Finance, 26 (2011), 121–144.CrossRefGoogle Scholar
Png, I. P. L. “US R&D, 1975–1998: A New Dataset.” Strategic Management Journal, 40 (2019), 715–735.CrossRefGoogle Scholar
Roychowdhury, S. “Earnings Management Through Real Activities Manipulation.” Journal of Accounting and Economics, 42 (2006), 335–370.CrossRefGoogle Scholar
Sandner, P. G., and Block, J.. “The Market Value of R&D, Patents, and Trademarks.” Research Policy, 40 (2011), 969–985.CrossRefGoogle Scholar
Stein, J. C. “Takeover Threats and Managerial Myopia.” Journal of Political Economy, 96 (1988), 61–80.CrossRefGoogle Scholar
Stein, J. C. “Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior.” Quarterly Journal of Economics, 104 (1989), 655–669.CrossRefGoogle Scholar
Stoffman, N.; Woeppel, M.; and Yavuz, M. D.. “Small Innovators: No Risk, No Return.” Journal of Accounting and Economics, 74 (2022), 101492.CrossRefGoogle Scholar
Terry, S. J. “The Macro Impact of Short-Termism.” Econometrica, 91 (2023), 1881–1912.CrossRefGoogle Scholar
Trajtenberg, M.; Henderson, R.; and Jaffe, A.. “University Versus Corporate Patents: A Window on the Basicness of Invention.” Economics of Innovation and New Technology, 5 (1997), 19–50.CrossRefGoogle Scholar
Supplementary material: File

Almeida et al. supplementary material

Almeida et al. supplementary material
Download Almeida et al. supplementary material(File)
File 778.8 KB