Do stock buybacks stifle innovation?

Pressure creates diamonds. Some companies have embraced this mindset to spark inventions

Featured faculty: Kevin Tseng
Written by Putro Harnowo

Public companies around the world are increasingly buying back their own stock. American firms are expected to set a record of US$1.1 trillion in share repurchases this year, led by Apple and Nvidia, while Asian companies have bought back US$266 billion in shares by August 2025, already 1.7 times more than last year.

Despite the growing trend, reactions surrounding this practice, simply called buybacks, have been mixed. American venture capitalist Nick Hanauer once said stock buybacks kill the economy, Senator Elizabeth Warren called them a tool to inflate executive pay, and the US Secretary of State Marco Rubio has aimed to limit buybacks so companies invest in capital spending instead.

Companies buy their shares back for many reasons, such as returning excess cash to shareholders or signalling confidence in their prospects. In some cases, buybacks can also help lift earnings per share (EPS), a key metric to show how much profit is attributed to each share, by reducing the number of shares outstanding.

Public firms typically set quarterly targets for their EPS, which also serves as a benchmark for evaluating firm performance. When firms miss this goal, their stock price and investors’ confidence may drop.

Treading on the verge of missing the EPS target put companies under “earnings pressure,” leading them to buy back some of their own shares. The caveat is stock buyback requires substantial cash, so companies often cut back spending on capital expenditures, employment, and research and development afterwards.

Critics argue that such a short-term cash flow strategy can compromise long-term innovation. However, Kevin Tseng, Professor at the Chinese University of Hong Kong (CUHK) Business School, proposes an alternative view. His recent collaborative study, Innovation under pressure, shows some firms increase their innovation output following EPS-motivated buybacks, even expanding their product lines beyond existing offerings.

“Buybacks spend a considerable amount of money, forcing firms to prioritise higher-value projects rather than indiscriminately trimming research and development,” he says. “Earnings pressure from buybacks does not appear harmful to innovation outputs because it can spur innovation efficiency.”

“Pressure does not necessarily suppress innovation but can sharpen resource allocation, encouraging focus on the most promising projects.”

Professor Kevin Tseng

How earnings pressure can drive innovations?

Along with the University of Illinois at Urbana-Champaign’s Heitor Almeida and Mathias Kronlund, as well as Vyacheslav Fos of Boston College and Hsu Po-Hsuan of National Tsing Hua University, Professor Tseng obtains the US firms’ financial information from the Centre for Research in Security Prices and Compustat, and collects EPS data from the Institutional Brokers’ Estimate System.

They focus on firms that have filed patents with the US Patent and Trademark Office from 1988 to 2015, within two years before experiencing earnings pressure. After excluding financial and utility firms, the final sample consists of 2,312 unique firms.

The researchers categorise the firms based on their innovative efficiency by assessing how effectively they have converted research and development spending into new patents. Those good at producing patents relative to their spending are classified as innovation-efficient.

Firms that are more innovation-efficient tend to cut their less productive projects and are more agile in reallocating their research and development towards higher-impact and the most profitable projects. Earnings pressure pushes these firms to produce more new ideas and inventions, particularly in the first year after buybacks, and persists for about three years before diminishing.

“Thus, the pressure can repeatedly shape innovation outcomes, but the benefits are not permanent, as they taper off unless renewed,” says Professor Tseng.

Innovation-efficient firms facing earnings pressure are also more likely to increase the number of researchers and scientists. By doing so, these firms are better positioned to access more new knowledge and explore more innovative technologies.

Further analyses show innovation-efficient firms increasingly use new knowledge by 2.5 per cent and boost their patent ratio in previously unknown fields by 3 per cent following earnings pressure. Using trademark data from the patent office, the researchers find such reallocation results in 4 per cent more product categories than before.

Meanwhile, less innovation-efficient firms are prone to cut research and development spending when facing earnings pressure. “Less innovation-efficient firms’ projects usually don’t lead to many patents, so when these companies face pressure to meet earnings goals, cutting back on research is the easiest and least harmful way to save money,” says Professor Tseng.

How do some firms thrive under pressure?

It may sound puzzling to see that some firms could increase the number of researchers and patents amid earnings pressure. Further analyses find innovation-efficient firms reallocate their expenditure by selling or closing their existing plants, then invest in new technologies.

Professor Tseng attributes such agility to short innovation life cycles and patent portfolio diversity. A short innovation life cycle means new products are developed, improved, and replaced quickly, such as those in consumer electronics, software, and fast fashion industries. In contrast, a long innovation life cycle means the products remain relevant for many years before being replaced, such as pharmaceuticals, chemicals, and industrial equipment.

Firms in industries with short innovation life cycles are used to a fast pace in technological development and have greater flexibility in reallocating resources across different projects. Additionally, firms with a diversified patent portfolio can easily switch focus and adapt to changes.

Finally, to be more innovation-efficient, Professor Tseng suggests firms examine how well their research projects perform, explore different technology areas, and keep an eye on how new and different their patents are. “By identifying and emphasising their most productive or novel lines of research, firms can weather earnings pressure without sacrificing long-term innovation,” he says.

Although the study focuses on US public firms, he believes the findings can apply to a wider context. Even without public earnings targets, startups and private firms often face external milestones, such as investor expectations or financing constraints, which generate similar short-term pressure.

“Pressure does not necessarily suppress innovation but can sharpen resource allocation, encouraging focus on the most promising projects,” he adds. “The key is to avoid across-the-board cuts and instead redirect resources towards higher-value opportunities.”