Stock Returns and Geographic Innovation Index

Abstract

Using surveys, on-site interviews of approximately 225 publicly-traded pharmaceutical firms in the United States, and a matching dataset with 42,849 observations of pharmaceutical patent citations, we combine both quantitative and qualitative research methods to investigate the relations between geographic proximity to innovation resources and stock returns. We develop a geographic innovation index to capture the key geographic factors that might have a positive impact on the firm's knowledge creation. We then examine the stock investment performance in terms of risk-adjusted returns for companies that have greater proximity to geographic innovation resources versus those companies that have less proximity to geographic innovation resources. We find that investments in companies with greater proximity to geographic innovation resources tend to achieve better risk-adjusted returns in the stock markets.