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Innovation Under Pressure

Author

Listed:
  • Almeida, Heitor
  • Fos, Vyacheslav
  • Hsu, Po-Hsuan
  • Kronlund, Mathias
  • Tseng, Kevin

Abstract

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.

Suggested Citation

  • Almeida, Heitor & Fos, Vyacheslav & Hsu, Po-Hsuan & Kronlund, Mathias & Tseng, Kevin, 2025. "Innovation Under Pressure," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 60(5), pages 2088-2120, August.
    • Handle: RePEc:cup:jfinqa:v:60:y:2025:i:5:p:2088-2120_1
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