Study links quarterly pressure to fewer breakthrough patents
Research on U.S. public companies finds short-term financial demands are associated with less influential and novel innovation.
By Priya Raghavan · Science Reporter
3 min read
Public companies under stronger pressure to meet near-term financial targets tend to produce fewer breakthrough inventions, according to research in Management Science. The finding matters because the study links capital-market pressure to the kind of innovation that can shape industries over many years.
The study, titled “The Changing Nature of Firm Innovation: Short-Termism and Influential Innovation in U.S. Public Firms,” was published in the INFORMS journal Management Science. INFORMS said the work was recognized with the Panmure House Prize, a major academic award in the United Kingdom open to researchers worldwide.
Researchers examined thousands of publicly traded U.S. companies from 1997 through 2015 and used patent records to assess innovation quality. The team included Yuan Shi of Cornell University, Rachelle C. Sampson and Brent Goldfarb of the University of Maryland, and Rafael A. Corredoira of Newcastle University.
The authors measured innovation in two main ways, according to INFORMS. One metric looked at patent influence, based on how often later patents relied on earlier inventions. Another assessed novelty by studying whether companies were combining technological ideas in new ways.
Those measures allowed the researchers to look beyond the volume of patents and focus on whether inventions were likely to matter. INFORMS said the study found that firms facing greater short-term financial pressure generated fewer inventions that were both influential and novel.
Shi said the research showed that companies subject to stronger short-term demands produced fewer inventions with the potential to reshape industries and create long-run investor value. The study frames that result as evidence for a long-running concern in U.S. business: quarterly and annual performance expectations can discourage projects that take years to pay off.
The researchers also tested whether the relationship reflected causation rather than a pattern occurring for unrelated reasons. INFORMS said they studied changes in institutional investor ownership and compared firms around major transitions, including mergers and moves between private and public ownership.
Sampson said the results held after the authors considered other possible explanations and tested for causal effects. According to INFORMS, the evidence points to a change in the type of innovation pursued by public companies as investors put more weight on short-term financial results.
The study suggests that companies may become more likely to favor projects with clearer and faster payoffs under those conditions. Longer-term research programs, which can require heavy investment and patience, may become harder for managers to defend when financial markets focus on immediate results.
Goldfarb said companies and investors may forgo valuable opportunities when long-range research is dropped because of capital-market pressure. He said those choices can affect single firms as well as entire industries.
The researchers also found that influential patents among public companies became more concentrated over time. Corredoira said declines among public firms were not fully made up by increases from private companies or venture-capital-backed firms.
INFORMS said the study raises questions for executives, investors and policymakers about how to balance current financial expectations with investment in future discoveries. The researchers suggested that companies could give investors broader evidence of innovation performance, including indicators such as patent novelty and influence, rather than relying only on research-and-development spending.
This story draws on original reporting from Phys.org.