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

Published online by Cambridge University Press:  14 April 2020

Heitor Almeida ,
Po-Hsuan Hsu ,
Dongmei Li  and
Kevin Tseng
Heitor Almeida*
Affiliation:
Almeida, halmeida@illinois.edu, University of Illinois at Urbana–Champaign Gies College of Business and National Bureau of Economic Research
Po-Hsuan Hsu
Affiliation:
Hsu, pohsuanhsu@mx.nthu.edu.tw, National Tsing Hua University College of Technology Management and National Taiwan University Center for Research in Econometric Theory and Applications
Dongmei Li
Affiliation:
Li, Dongmei.li@moore.sc.edu, University of South Carolina Darla Moore School of Business
Kevin Tseng
Affiliation:
Tseng, kevin.tseng@rich.frb.org, Federal Reserve Bank of Richmond and University of Kansas School of Business
*
Almeida (corresponding author), halmeida@illinois.edu
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 1 , February 2021 , pp. 1 - 28
Copyright
© Michael G. Foster School of Business, University of Washington 2019

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Footnotes

We thank an anonymous referee and Jarrad Harford (the editor) for helping us improve the paper. We also thank Ashish Arora, Julian Atanassov, Warren Bailey, Allen Berger, Aaron Chatterji, Sudheer Chava (SFS Cavalcade discussant), I-Ju Chen, Robert DeYoung, Dhammika Dharmapala, Jin-Chuan Duan, Jeff Furman, Jeffrey Gerlach. Radha Gopalan, Amit Goyal, Christoph Herpfer, David Hirshleifer, Gerard Hoberg, Minjie Huang, Ravi Jagannathan, Benjamin Jones, Kissan Joseph, Michelle Lowry, Pedro Matos, Felix Meschke, Ramana Nanda, Artem Neklyudov, Yiming Qian (CICF discussant), Amit Seru, Scott Stern, Mingzhu Tai, Kelvin Tan (FMA Asia/Pacific discussant), Xuan Tian, Tsvetan Tsvetanov, John Wei, Keith Wong, Fang Yu, and conference and seminar participants at the SFS Cavalcade North America 2018, FMA Asia/Pacific 2018, 2017 AIEA-NBER Conference, 2017 Taiwan Economics Research Conference, China Europe International Business School, Goethe University, Federal Reserve Bank of Richmond, Hong Kong Polytechnic University, Kent State University, University of Cincinnati, University of Hong Kong, University of Lausanne, and University of Kansas for valuable discussions and comments. We thank Michael Faulkender and Mitchell Petersen for providing their repatriation data and Minjie Huang for providing CEO overconfidence data. Suzanna Emelio, Cooper Killen, Qi Lin, Chao-Jhih Liu, and Stephanie Zheng provided excellent research assistance. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System. Hsu acknowledges financial support from the Ministry of Education and Ministry of Science and Technology in Taiwan (MOE Grant no. 109L900202 and MOST Grant no. 108-3017-F-002-003). All errors are ours.

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