Small Innovators: No Risk, No Return

63 Pages Posted: 13 Dec 2018 Last revised: 8 Mar 2022

See all articles by Noah Stoffman

Noah Stoffman

Indiana University - Kelley School of Business - Department of Finance

Michael Woeppel

Indiana University - Kelley School of Business - Department of Finance

M. Deniz Yavuz

Purdue University - Krannert School of Management

Date Written: March 7, 2022

Abstract

We show that small innovators (i.e., small firms with recent patent grants) earn higher future returns than small non-innovators. However, we find no such innovation premium among large firms. The higher returns are driven by risk, not underreaction to announcements of recent patent grants. We find that being small and innovative interacts with financial constraints to explain the higher returns. These interactions are more important in the presence of greater information asymmetry. The higher cost of equity among small innovators has implications for their investment, growth, and capital structure decisions.

Keywords: Cost of equity, disclosure, innovation, patents, small firms

JEL Classification: D23, G14, M41, O30, O31, O34

Suggested Citation

Stoffman, Noah and Woeppel, Michael and Yavuz, M. Deniz, Small Innovators: No Risk, No Return (March 7, 2022). Journal of Accounting & Economics (JAE), Forthcoming, Kelley School of Business Research Paper No. 19-5, Available at SSRN: https://ssrn.com/abstract=3291471 or http://dx.doi.org/10.2139/ssrn.3291471

Noah Stoffman (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
(812) 856-5664 (Phone)

HOME PAGE: http://kelley.iu.edu/nstoffma/

Michael Woeppel

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

M. Deniz Yavuz

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

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