Tax policy and innovation performance: Evidence from enactment of the Alternative Simplified Credit

We examine how direct tax incentives affect firm innovation performance using a new U.S. R&D tax credit regime enacted in 2007, the Alternative Simplified Credit (ASC). A difference-in- differences analysis indicates that innovation performance is poorer for ASC users than for firms using the original R&D tax credit method following the ASC enactment. The results are stronger for firms with poorer governance and greater innovation diversity. ASC users suffer from poorer profitability and lower valuations. The findings remain robust to self-selection bias and various robustness checks. Our evidence favors a dark-side view of R&D tax credit effects under the ASC