Innovative Efficiency and Stock Returns

Hirshleifer, David; Hsu, Po-Hsuan; Li, Dongmei

doi:10.2139/ssrn.1799675

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Innovative Efficiency and Stock Returns

Journal of Financial Economics (JFE), Vol. 107, 2013

62 Pages Posted: 4 Apr 2011 Last revised: 15 Jun 2018

See all articles by David Hirshleifer

David Hirshleifer

University of Southern California - Marshall School of Business - Finance and Business Economics Department; National Bureau of Economic Research (NBER)

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance; National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance

Date Written: February 22, 2012

Abstract

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.

Link to the presentation slides: https://ssrn.com/abstract=3191073.

Keywords: innovative efficiency, limited attention

JEL Classification: G12, G14, O3

Suggested Citation: Suggested Citation

Hirshleifer, David and Hsu, Po-Hsuan and Li, Dongmei, Innovative Efficiency and Stock Returns (February 22, 2012). Journal of Financial Economics (JFE), Vol. 107, 2013, Available at SSRN: https://ssrn.com/abstract=1799675 or http://dx.doi.org/10.2139/ssrn.1799675