Misvaluing Innovation

Lauren  Cohen; Karl  Diether; Christopher  Malloy

Article | Review of Financial Studies | March 2013

Misvaluing Innovation

by Lauren Cohen, Karl Diether and Christopher Malloy

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;

Format: Print

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Citation:

Cohen, Lauren, Karl Diether, and Christopher Malloy. "Misvaluing Innovation." Review of Financial Studies 26, no. 3 (March 2013): 635–666.

After the 2015 Nepal earthquake, the Chaudhary Group, a billion-dollar conglomerate in Nepal decides to play a pivotal role in re-building the country. The Group's philanthropic arm (Chaudhary Foundation) works with stakeholders and develops a blue print for short- and long-term relief measures. The management needs to address several questions as they navigate the foundation's course. What element of relief work should the foundation focus on? Should they go beyond addressing the immediate need for shelters and adopt a more holistic development plan? How should they acquire technical expertise and organize themselves to successfully execute this effort? The case focuses on how businesses can drive entrepreneurship and disaster management efforts and be agents for social change in the emerging markets grappling with institutional voids. How should they work with the government in this endeavor? How do they ensure an alignment of these efforts to the group and foundation's long-term focus areas and objectives?

This B case is a supplement to the Chaudhary Group: Rebuilding Nepal case. Having successfully spearheaded relief work in the aftermath of the Nepal earthquake the Chaudhary Foundation envisions creating a more comprehensive and sustainable development model. They are keen to build a model village that integrates components of shelter, education, skill development and livelihood creation and affords residents a basic standard of living. What should the blueprint of this sustainable ecosystem include? Who are the stakeholders they should collaborate with on this effort? Can this model be replicated at scale across the country?

Case | HBS Case Collection | March 2018

Chaudhary Group: Rebuilding Nepal

Christopher J. Malloy, Lauren H. Cohen, Inakshi Sobti, Christopher J. Malloy, Lauren H. Cohen and Inakshi Sobti

Keywords: Leadership; Family Business; Decision Choices and Conditions; Developing Countries and Economies; Social Entrepreneurship; Values and Beliefs; Venture Capital; Microfinance; Geographic Location; Collaborative Innovation and Invention; Management; Crisis Management; Management Teams; Resource Allocation; Business and Community Relations; Business and Government Relations; Natural Disasters; Social and Collaborative Networks; Social Issues; Business Strategy; Consumer Products Industry; Banking Industry; Auto Industry; Real Estate Industry; Travel Industry; Nepal;

Citation:

Malloy, Christopher J., Lauren H. Cohen, and Inakshi Sobti. "Chaudhary Group: Rebuilding Nepal." Harvard Business School Case 218-100, March 2018. View Details

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