Technological Innovation and Stock Returns: Skill vs. Luck

• In Event: Financial Reporting: Analysts, Investors, and Creditors

Abstract

Prior studies conclude that investors undervalue innovative ability (Lauren Cohen et al., 2013;
Hirshleifer et al., 2013, 2018). These studies do not fully capture the prominent role that industry
and market trends play in contextualizing innovations. We disaggregate the value generated by
innovative skill from the value generated by industry and market trends and find that innovative
skill is positively associated with profitability. Further, our results are consistent with a risk
explanation as skill is negatively associated with returns, consistent with investors using patent
value to identify innovative skill and adjusting the riskiness of the firm accordingly.

Authors

• Ben Angelo, Ball State University

• Mitchell Johnston, University of Dayton