What if the pressure to hit short-term earnings targets didn’t stifle innovation – but actually enhanced it? In a surprising twist to conventional wisdom, new research suggests that under certain conditions, companies striving to meet earnings expectations might become more efficient – and even more innovative.

A common performance metric in the business world is earnings per share (EPS). Companies often feel compelled to meet or exceed analyst EPS forecasts to maintain investor confidence. One way they do this is through stock buybacks – repurchasing shares to reduce the total share count, thereby boosting the EPS ratio. But stock buybacks come at a cost. They require cash, and companies frequently fund them by cutting discretionary spending, including research and development (R&D). The prevailing belief is that reducing R&D dampens future innovation.

However, a recent study led by Gies Business professors Heitor Almeida and Mathias Kronlund, in collaboration with Vyacheslav Fos (Boston College), Po-Hsuan Hsu (National Tsing Hua University), and Kevin Tseng (Chinese University of Hong Kong), paints a more nuanced picture. In their article “Innovation Under Pressure” they explore what happens to innovation when firms execute buybacks to meet EPS targets. Surprisingly, they found that innovation, measured through patent filings and impact, can actually increase under such financial pressure. Their findings were published in Journal of Financial and Quantitative Analysis.

To assess innovation, the researchers didn't stop at counting patents. They evaluated patent quality and value, analyzing how markets reacted to patent announcements and how often those patents were cited in subsequent research – both strong indicators of technological significance.

“We collected data on innovation outcomes – patents, patent citations,” Almeida explained. “And then we looked at what happened to these outcomes after companies decided to spend cash on stock repurchases to meet EPS targets.”

Contrary to expectations, firms that felt earnings pressure often improved their innovation output – not just in quantity, but also in impact. Some companies, under the pressure of meeting EPS targets, appeared to prioritize innovation more strategically, reallocating internal resources without necessarily cutting R&D budgets.

“These firms, when they spend money on buybacks, become better at innovation,” Kronlund noted. “They don't reduce innovation spending; instead, they reorganize other parts of the business to maintain it. In some cases, they end up producing more valuable patents.”

In particular, “innovation-efficient firms” – those that already generate strong innovation per dollar spent – showed the most pronounced improvement. Even when resources were reallocated, these firms became more effective, producing patents that were better cited and more economically valuable.

Could this improvement be an illusion – mere “window dressing”? The researchers considered that possibility. But they found little evidence to support it. The patents that emerged from these pressured periods weren’t just for show – they were cited in future research and generated positive market reactions, signaling genuine advances.

This study challenges the common assumption that short-term financial goals necessarily come at the expense of long-term innovation. “Good things can come out of external constraints,” said Kronlund. “Our results add nuance to the literature on short-termism by showing that it doesn’t always hurt long-term outcomes.”

As the corporate world continues to grapple with balancing shareholder expectations and long-term value creation, this research suggests a more complex relationship. Sometimes, pressure doesn't just push companies to cut corners – it can push them to sharpen their edge.