Innovative Efficiency and Stock Returns
62 Pages Posted: 4 Apr 2011 Last revised: 15 Jun 2018
Date Written: February 22, 2012
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