More Cash, Less Innovation: The Effect of the American Jobs Creation Act on Patent Value

Abstract

Firms can become less innovative following a sudden “inflow” of cash. Specifically, multinational firms that were eligible to repatriate (and indeed repatriated) cash to the U.S. under the American Jobs Creation Act generate less valuable patents than otherwise similar firms. They also conduct more exploratory activities. This effect only exists among firms in less competitive industries, firms with lower institutional ownership, and firms with overconfident CEOs, and is mainly driven by the reduction in the value of U.S.-originated patents. Our evidence suggests that, without appropriate governance, a cash windfall may lead managers to engage in riskier innovation strategy that can destroy value.

Keywords: Financial Slack, Innovation Strategy, Agency Problem

JEL Classification: G32; G34; O32