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

Abstract

Firms can become less innovative following a sudden cash “inflow.” Specifically, multinational firms that were eligible to repatriate (and indeed repatriated) cash to the United States under the American Jobs Creation Act (AJCA) generate less valuable patents than otherwise similar firms. They also explore more. This effect only exists among firms in less competitive industries, firms with lower institutional ownership (IO), and firms with overconfident chief executive officers (CEOs); this effect 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, which can destroy value.

Reexaming the Economic Recovery Tax Act of 1981: Evidence From Innovative Efficiency

“…Chircop, Collins, Hass and Nguyen (2020) show that innovative efficiency increases when a firm's accounting system is more comparable to its industry peers. Both Merz (2021) and Almeida, Hsu, Li and Tseng (2021) find that innovative efficiency is negatively associated with financial constraint.…”

Financial reporting and corporate innovation: a review of the international literature

“…The positive association is more pronounced in countries with less-developed financial markets and with institutions and infrastructures more conducive to innovation, as well as in more competitive and high-tech industries. However, Almeida et al (2021) find that an injection of additional resources reduces the value of innovation. In particular, for unconstrained firms, additional financial resources can further increase the 'tolerance for failure', leading to excessive risk-taking and, consequently, a reduction in innovation value.…”

“…Hence, a firm's choices between exploratory and exploitative innovation strategies, and its R&D capital allocation decisions could be determined by the firm's tolerance for failure. Corporate governance, managerial compensation plan and financial slack could affect tolerance for failure (Manso, 2011;Balsmeier et al, 2017;Almeida et al, 2021), whereas the accounting and control system plays a vital role in the R&D capital allocation process, to spur innovation.…”

“…Manso (2011) brings the concepts of exploration and exploitation into the design of optimal innovation-motivating incentive schemes. This concept is later adopted by Lin et al (2020), Jia (2017bJia ( , 2019 and Almeida et al (2021) as a proxy for different types of innovation strategies. A patent is classified as exploratory if at least 60-90 percent (the percentage varies across studies) of its citations are based on new knowledge.…”

Access to Capital and Investment Composition: Evidence from Fracking in North Dakota

“…In addition, Asker, Farre-Mensa, and Ljungqvist (2014) finds that public firms investments are less responsive to changes in investment opportunities than private firms. In addition, Almeida et al (2017) finds that less financial slack mitigates agency frictions and leads to more efficient generation of innovation (although they consider only public firms). Our findings affirm that private firms invest differently than do public firms, and that lack of access to financing can foster more a more innovative investment mix.…”