The Changing Nature of Firm Innovation: Short-Termism and Influential Innovation in U.S. Public Firms

We examine the link between short-term pressures and technologically significant innovation in U.S. public firms in 1997–2015. Using a market-based measure of short-term pressure, we estimate its relationship with influential and novel patents. We find that firms facing more intense short-term pressures are less likely to patent highly influential or novel innovations. To evaluate whether this relationship is causal, we use changes in ownership styles following financial institution mergers as instruments. Our analysis suggests that changing short-term pressures from investors had a causal impact on firm innovative outcomes; this finding is robust to a wide variety of empirical specifications. While public firms as a whole retained a constant share of highly influential patents, this activity has become more concentrated in fewer firms. This shift does not appear to be fully compensated by an increase in technologically significant patents by nonpublic firms such as venture-capital (VC)-backed start-ups. These findings raise questions about capital markets’ impact on firm R&D strategy and the nature of innovative activities in public firms. This paper was accepted by Ashish Arora, entrepreneurship and innovation. Funding: The authors gratefully acknowledge financial support from the inaugural Panmure House Prize for Long-term Thinking and Radical Innovation for this research, as well as Matt Marx for facilitating institutional support at Cornell for this research. B. Goldfarb and R. Corredoira received partial financial support from the National Science Foundation [Grant 1565553]. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2022.00857 .