Innovation Under Pressure

Heitor Almeida, Slava Fos, Po-Hsuan Hsu, Mathias Kronlund, and Kevin Tseng

♦ Firms become more efficient at innovation when they face pressure to meet Earnings Per Share (EPS) targets and 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. This stems from better R&D resource allocation and a heightened 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) R&D investments. Our study demonstrates how earnings pressure prompts more efficient spending through a free cash flow channel, fostering innovation.

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