Uncertainty, Investor Sentiment, and Innovation

Review of Financial Studies, forthcoming

48 Pages Posted: 21 Oct 2015 Last revised: 22 Apr 2020

See all articles by David L. Dicks

David L. Dicks

Baylor University - Department of Finance, Insurance & Real Estate

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School; European Corporate Governance Institute (ECGI)

Multiple version iconThere are 2 versions of this paper

Date Written: April 20, 2020

Abstract

We develop a theory of innovation waves, investor sentiment, and merger activity based on Knightian uncertainty. Uncertainty-averse investors are more optimistic on an innovation when they can make contemporaneous investments in multiple uncertain projects. Innovation waves occur when there is a critical mass of innovative companies, and are characterized by stronger investor sentiment, higher equity valuation, and hot IPO markets. Our approach to investor sentiment is not based on erroneous beliefs disjoint from economic fundamentals, but depends on uncertainty on the fundamentals. Our model can explain sector-specific booms uncorrelated with aggregate economic activity and the overall stock market.

Keywords: Investor Sentiment, Innovation, Ambiguity Aversion, Hot IPO Markets, Mergers

JEL Classification: D81, G34, O31

Suggested Citation

Dicks, David L. and Fulghieri, Paolo, Uncertainty, Investor Sentiment, and Innovation (April 20, 2020). Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=2676854 or http://dx.doi.org/10.2139/ssrn.2676854

David L. Dicks (Contact Author)

Baylor University - Department of Finance, Insurance & Real Estate ( email )

P.O. Box 98004
Waco, TX 76798-8004
United States

Paolo Fulghieri

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
357
Abstract Views
3,423
rank
105,817
PlumX Metrics