Presented at: 2026 Global Finance Conference, 2026 Vietnam Symposium in Entrepreneurship, Finance, and Innovation, CityUHK Brown Bag Seminar.
Abstract: This study investigates the extent to which firms’ reliance on flexible employment influences corporate innovation. Using a difference-in-differences design around a 2004 Massachusetts law (the MICL) that led to an exogenous decline in independent contractor usage, I find a significant decline in both the quantity and quality of innovation activities among firms headquartered in Massachusetts after the implementation of the law. This finding is more pronounced for firms that rely extensively on the usage of independent contractors, suggesting that the decline in innovation is attributable to the MICL. To underpin the channel linking restrictions on IC usage to declines in corporate innovation, I find that the negative relation is amplified among financially constrained firms. This implies that the decline in IC usage imposes extra financial burden on firms that constrains their ability to invest in innovative activities. In supplementary analyses, I find that the financial strain imposed by the MICL limits firms’ ability to pursue more explorative innovation, forcing them to concentrate primarily on exploitative innovation instead. Overall, the results suggest that the MICL imposes real costs on firms in Massachusetts.