Do Short-term Incentives Hurt Innovation?

57 Pages Posted: 5 Sep 2020 Last revised: 4 Jun 2021

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: June 4, 2021

Abstract

We study how incentives to boost short-term performance affect longer-term innovation outputs. We find that incentives to meet current-quarter EPS targets using share repurchases are associated with an increase in the quality of future innovation outputs such as forward citation counts and the economic value of patents. These effects are concentrated among firms that are ex-ante more efficient at innovation, and associated with a shift in these firms’ innovation strategy. Firms are more likely to explore newer technologies and increase the breadth of knowledge sources and trademarks in the period after they face incentives to boost short-term performance. These effects on innovation are more positive among firms with more dedicated institutional investors, industries with shorter innovation life cycles, and firms with greater patent diversity. Our evidence illustrates that not all actions that appear short-termist have adverse long-term consequences but instead can have a bright side.

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

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? (June 4, 2021). Available at SSRN: https://ssrn.com/abstract=3663903 or http://dx.doi.org/10.2139/ssrn.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

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
307
Abstract Views
1,551
rank
121,932
PlumX Metrics