We examine the consequences of real earnings management from an innovation perspective and investigate the patent output of firms likely to be managing earnings through altering their R&D expenditures. We find that R&D cuts related to earnings management lead to fewer patents, less influential patent output, and lower innovative efficiency compared to other R&D cuts. Our results thus suggest that real earnings management may obstruct firms’ technological progress and highlight the potential costs of managerial manipulation of R&D expenditures to alter reported earnings.

Motivated by a theoretical model, we examine for 43 countries whether it is policy or policy uncertainty that affects technological innovation more. Innovation activities, measured by patent-based proxies, are not, on average, affected by which policy is in place. Innovation activities, however, drop significantly during times of policy uncertainty measured by national elections. The drop is greater for more influential innovations (citations in the right tail, exploratory rather than exploitative innovations) and for innovation-intensive industries. We use close presidential elections and ethnic fractionalization to address endogeneity concerns. We uncover the mechanism underlying the main result by showing that the number of patenting inventors decreases with policy uncertainty. Political compromise, we conclude, encourages innovation.

The 2008 Apex Oil court decision reduced the circumstances under which specific environmental cleanup obligations were dischargeable in Chapter 11, potentially affecting the securities prices, credit conditions, and pollution practices of corporations not in Chapter 11. We discover that among financially stressed firms with those specific environmental liabilities, bond and stock prices dropped after Apex. Moreover, those firms (1) experienced a tightening of credit conditions (e.g., paying higher risk premia on debts and receiving lower bond ratings), (2) intensified pollution prevention activities, and (3) reduced the emissions of pollutants causing environmental damages no longer dischargeable in Chapter 11. These findings hold among firms nationwide, not only those within the jurisdiction of the Seventh Circuit court, which issued the Apex decision, suggesting that Apex had a nationwide impact.

Using a series of advanced tests from White's (2000) “Reality Check” to correct for data-snooping bias, we assess the out-of-sample performance of various portfolio strategies relative to the naive 1/N rule. When we analyze 16 basic portfolio strategies, 126 learning strategies, and nearly 2,000 extended strategies, we find that some strategies outperform the 1/N rule in conventional tests that do not account for data-snooping bias. However, after we use the new tests that control for such bias, we find that none or very few of these strategies outperform the 1/N rule. Thus, our finding underscores the necessity to control for data-snooping bias when making asset allocation decisions.

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.

We identify a positive causal effect of healthy working environments on corporate innovation, using the staggered passage of U.S. state-level laws that ban smoking in workplaces. We find a significant increase in patents and patent citations for firms headquartered in states that have adopted such laws relative to firms headquartered in states without such laws. The increase is more pronounced for firms in states with stronger enforcement of such laws and in states with weaker preexisting tobacco controls. We present suggestive evidence that smoke-free laws affect innovation by improving inventor health and productivity and by attracting more productive inventors.

We propose firm-level innovation performance to be an important determinant of corporate creditworthiness and examine this relation from the perspective of bond investors. We find that firms' default probabilities are negatively related to the quantity, impact, originality, and generality of their patent portfolios. Moreover, bonds issued by more innovative firms have lower issuance premiums and lower realized excess returns. Our findings are further supported by instrumental regressions that use monetary and time costs of innovation, and by difference-in-differences tests based on exogenous shocks from state-level R&D tax credits.

Using patent lawsuit data from 2000 to 2014, we find that a stock portfolio consisting of alleged patent infringers (i.e., firms sued for patent infringement) provides significantly higher stock returns (between 0.48% to 0.61% per month) in the following year compared to other firms with similar characteristics. In contrast, plaintiff firms’ subsequent stock returns are not significantly different from comparable firms’ returns. We examine several possible explanations for this pattern, including pessimism-driven mispricing, exposure to unknown systematic risk, cash holdings, and financial constraints. Our evidence supports the explanation based on pessimism-driven mispricing.

In this paper, we empirically measure the impact of natural disasters on firm-level operating performance and examine if such impact can be mitigated by technology diversification. Using major natural disasters specified by Barrot and Sauvagnat (2015) and factory location data from the toxic release inventory (TRI) database, we first find that firms with factories located in states affected by natural disasters are much less profitable. Second, we find that firms with diversified technologies are significantly less subject to the impact of natural disasters, suggesting that technology diversity enhances firms’ sustainability.