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Innovative Efficiency and Stock Returns

62 Pages Posted: 4 Apr 2011 Last revised: 7 Nov 2014

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business; NBER

Po-Hsuan Hsu

University of Hong Kong

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.

Keywords: innovative efficiency, limited attention

JEL Classification: G12, G14, O3

Suggested Citation

Hirshleifer, David A. 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

David A. Hirshleifer

University of California, Irvine - Paul Merage School of Business ( email )

Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

NBER ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Po-Hsuan Hsu

University of Hong Kong ( email )

Pokfulam Road
Hong Kong
China

Dongmei Li (Contact Author)

University of South Carolina - Darla Moore School of Business - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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