Keywords

innovation, track records, return predictability, patents, asset pricing

Abstract

We demonstrate that a firm’s ability to innovate is predictable, persistent, and relatively simple to compute, and yet the stock market ignores the implications of past successes when valuing future innovation. We show that two firms that invest the exact same in research and development (R&D) can have quite divergent, but predictably divergent, future paths. Our approach is based on the simple premise that while future outcomes associated with R&D investment are uncertain, the past track records of firms may give insight into their potential for future success. We show that a long-short portfolio strategy that takes advantage of the information in past track records earns abnormal returns of roughly 11 percent per year. Importantly, these past track records also predict divergent future real outcomes in patents, patent citations, and new product innovations.

Original Publication Citation

Misvaluing Innovation, 2013, with Lauren Cohen and Christopher Malloy, Review of Financial Studies, 26, 635–66.

Document Type

Peer-Reviewed Article

Publication Date

2012

Publisher

Review of Financial Studies

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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