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.
Original language | English (US) |
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Journal | Journal of Financial and Quantitative Analysis |
DOIs | |
State | Accepted/In press - 2024 |
Externally published | Yes |
ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics