ClearLife: From Prospect to Platform
Citation:
Braun, Alexander, Lauren H. Cohen, Mauro Elvedi, and Jiahua Xu. "ClearLife: From Prospect to Platform." Harvard Business School Teaching Note 220-036, October 2019. View Details|
Article Review of Financial Studies March 2013 Misvaluing Innovation |
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% per year. Importantly, these past track records also predict divergent future real outcomes in patents, patent citations, and new product innovations.
Keywords: innovation; Return Predictability; R＆D; Information; Forecasting and Prediction; Research and Development; Innovation and Invention;
Citation:
Cohen, Lauren, Karl Diether, and Christopher Malloy. "Misvaluing Innovation." Review of Financial Studies 26, no. 3 (March 2013): 635–666.
