Innovative Originality, Profitability, and Stock Returns

Review of Financial Studies, Forthcoming

75 Pages Posted: 26 Jul 2012 Last revised: 15 Jun 2018

See all articles by David A. Hirshleifer

David A. Hirshleifer

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

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Dongmei Li

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 5, 2017

Abstract

We propose that innovative originality is a valuable organizational resource, and that owing to limited investor attention and skepticism of complexity, greater innovative originality may be undervalued. We find that firms’ innovative originality strongly predicts higher, more persistent, and less volatile profitability; and higher abnormal stock returns—findings that are robust to extensive controls. The return predictive power of innovative originality is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to innovative originality. This evidence suggests that innovative originality acts as a ‘competitive moat,’ and is undervalued by the market.

Link to the presentation slides: https://ssrn.com/abstract=3191097.

Keywords: Limited attention, Market efficiency, Processing fluency, Innovative originality, Complexity, Ambiguity aversion

JEL Classification: G11, G12, G14, O32

Suggested Citation

Hirshleifer, David A. and Hsu, Po-Hsuan and Li, Dongmei, Innovative Originality, Profitability, and Stock Returns (July 5, 2017). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2117516 or http://dx.doi.org/10.2139/ssrn.2117516

David A. Hirshleifer (Contact Author)

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

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Dongmei Li

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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