Innovation Under Pressure

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 fo...

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Veröffentlicht in:Journal of financial and quantitative analysis 2024-05, p.1-33
Hauptverfasser: Almeida, Heitor, Fos, Vyacheslav, Hsu, Po-Hsuan, Kronlund, Mathias, Tseng, Kevin
Format: Artikel
Sprache:eng
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Zusammenfassung: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.
ISSN:0022-1090
1756-6916
DOI:10.1017/S0022109024000358