The impact of privacy regulation on innovation in the data economy is a critical topic in ongoing debates among scholars and policymakers. Despite its prominence, empirical evidence remains limited within the field of Information Systems (IS) on how privacy regulation shapes innovation. This study explores the effects of privacy regulation on data processing innovation, with particular attention to whether such regulation fosters conditions conducive to privacy-enhancing innovation. Employing a difference-in-differences approach, we analyse changes in U.S. firms’ data processing patent filings following the enforcement of the California Consumer Privacy Act. We observe a significant decline in data processing innovation—including privacy-enhancing efforts—after the CCPA’s enactment. Further analysis shows that this effect is unevenly distributed, with innovation efforts becoming more concentrated in areas with established IT sectors. This study contributes to the emerging IS literature on the impact of privacy regulations and offers insights into balancing regulation and innovation.