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Do Short-term Incentives Hurt Innovation?

42 Pages Posted: 5 Sep 2020

See all articles by Heitor Almeida

Heitor Almeida

University of Illinois at Urbana-Champaign; National Bureau of Economic Research (NBER)

Vyacheslav Fos

Boston College - Department of Finance; European Corporate Governance Institute (ECGI); Centre for Economic Policy Research (CEPR)

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Mathias Kronlund

Tulane University

Kevin Tseng

National Taiwan University - Department of Finance; National Taiwan University - Center for Research in Econometric Theory and Applications

Date Written: July 30, 2020

Abstract

We study how incentives to boost short-term performance affect longer-term innovation output. Share repurchases that are motivated by an incentive to meet current-quarter EPS targets are associated with an increase in the quality of innovation outputs such as forward citation counts and the economic value of patents. These results appear to be driven by a shift in firms’ innovation strategy. Firms are more likely to explore newer technologies and to increase the scope of innovative activities following EPS-driven repurchases. Our evidence points out to a bright side of short-termist pressures, which can nudge firms towards more creative and impactful innovation.

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

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

Suggested Citation

Almeida, Heitor and Fos, Vyacheslav and Hsu, Po-Hsuan and Kronlund, Mathias and Tseng, Kevin, Do Short-term Incentives Hurt Innovation? (July 30, 2020). Available at SSRN: https://ssrn.com/abstract=3663903

Heitor Almeida

University of Illinois at Urbana-Champaign ( email )

515 East Gregory Drive
4037 BIF
Champaign, IL 61820
United States
217-3332704 (Phone)

HOME PAGE: http://www.business.illinois.edu/FacultyProfile/faculty_profile.aspx?ID=11357

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vyacheslav Fos

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Mathias Kronlund

Tulane University ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Kevin Tseng

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

National Taiwan University - Center for Research in Econometric Theory and Applications ( email )

1 Sec. 4, Roosevelt Road
Taipei 106, 106
Taiwan

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