Innovative Originality, Profitability, and Stock Returns
Review of Financial Studies, Forthcoming
75 Pages Posted: 26 Jul 2012 Last revised: 15 Jun 2018
Date Written: July 5, 2017
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: Suggested Citation