Innovative Efficiency and Stock Returns
David A. Hirshleifer
University of California, Irvine - Paul Merage School of Business
University of Hong Kong
UC San Diego - Rady School of Management
February 22, 2012
AFA 2012 Chicago Meetings Paper
We find that innovative efficiency (IE), patents or citations scaled by R&D, is a strong positive predictor of future returns after controlling for firm characteristics and risk. The IE-return relation is associated with the loading on a mispricing factor, and the high Sharpe ratio of the Efficient Minus Inefficient (EMI) portfolio suggests that mispricing plays an important role. Further tests based upon attention and uncertainty proxies suggest that limited attention contributes to the effect. The high weight of the EMI portfolio return in the tangency portfolio suggests that IE captures incremental pricing effects relative to well-known factors.
Number of Pages in PDF File: 62
Keywords: innovative efficiency, limited attention
JEL Classification: G12, G14, O3working papers series
Date posted: April 4, 2011 ; Last revised: February 22, 2012
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