Do Short-term Incentives Hurt Innovation?

Abstract

We find evidence that short-term pressures to raise earnings per share using stock repurchases have positive effects on firms’ innovative efficiency, owing to improved allocation of resources and greater focus on novel innovation. These effects manifest as increases in the influence of future innovation outputs, measured as forward citations and the economic value of patents, but only for firms that are relatively better at producing new innovation ex-ante. Our findings illustrate that short-term incentives can have a bright side even when short-term pressures are not associated with external interventions from private equity and hedge funds.

Keywords: Innovation, short-termism, EPS management, patents, trademarks, exploration

JEL Classification: G31, O31, G35, M20, M41