Stock Market Overvaluation, Moon Shots, And Corporate Innovation

• In Event: Pricing Growth and Innovation

Abstract

We test how market overvaluation affects corporate innovative activities and innovative success. We find that estimated stock overvaluation is positively associated with R&D spending, innovative output, and measures of innovation originality, generality and novelty. R&D spending is much more sensitive than capital investment to overvaluation. The effects of misvaluation on R&D spending come more from direct catering of firms to investor optimism than via the effect of misvaluation on equity issuance. The sensitivity of R&D and innovative output to misvaluation is greater among growth, overvalued, and high turnover firms. Our evidence suggests that market overvaluation may have social value by increasing innovative output and by encouraging firm to engage in ambitious ‘moon shots’.

Authors

• Ming Dong, Schulich School of Business, York University, Canada

• David Hirshleifer, University of California, Irvine

• Siew Hong Teoh, University of California-Irvine