We demonstrate that a firm's ability to innovate is predictable, persistent, and relatively simple to compute, and yet the stock market appears to ignore the implications of past successes when valuing future innovation. We show that two firms that invest the same in R&D can have quite divergent, but predictably divergent, future paths based on their past track records. A long-short portfolio strategy that takes advantage of the information in past track records earns abnormal returns of roughly 11% annually. Importantly, these past track records also predict divergent future real outcomes in patents, patent citations, and new product innovations.
The Review of Financial Studies – Oxford University Press
Published: Mar 21, 2013
Keywords: JEL G10 O30 G14
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