The impact of U.S. economic sanctions on corporate innovation and fraud

Abstract Economic sanctions have increasingly become a pivotal tool in modern foreign policy, especially in the context of U.S. international strategy. Despite their growing significance, there is a notable lack of empirical research on how these sanctions affect corporate behavior. This study aims to explore the impact of U.S. economic sanctions on innovation and fraudulent activities within Iranian firms subjected to these measures. Utilizing a difference‐in‐differences approach, the findings reveal a weak and negative relationship between sanctions and innovation, while no significant link is found between sanctions and fraudulent activities. Notably, the study uncovers a substantial divergence in companies' responses to sanctions based on their innovation background. Companies with a strong innovation background experience a significant increase in innovation efforts and a corresponding decline in fraudulent behavior upon facing sanctions. In contrast, companies lacking an established innovation background exhibit a reduction in innovation and, in turn, an escalation in fraudulent practices in response to sanctions. These findings remain robust across various sensitivity analyses. This research contributes to the expanding body of empirical literature on sanction outcomes by highlighting the profound impact of innovation background on the responsible and ethical decisions made by sanctioned companies.