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