Long-term Growth Forecasts and Market Efficiency with Respect to the Innovative Efficiency of R&D-Intensive Firms

Abstract

Prior research finds that investors have difficulty pricing corporate innovation. This paper investigates the role of long-term growth (LTG) forecasting financial analysts in the efficiency of stock prices and consensus sell-side analyst forecasts with respect to information about firms’ innovative efficiency (IE). Our first set of analyses reveal that underreaction to IE-related information dissipates for firms with LTG forecasts. Our second set of analyses further indicate that the credibility of LTG forecasts is crucial for them to influence the stock market and analyst forecast efficiency with respect to IE-related information. This result holds after we control for the quality of other research outputs published by LTG-forecasting analysts. Furthermore, conditional on the existence of other long-term analyst forecasts, we continue to find strong evidence consistent with LTG forecasts facilitating market pricing of IE. Collectively, our results support the notion that credible LTG forecasts serve as effective information channels for enhancing market efficiency with respect to IE-related information.

Keywords: Innovation, Patents, Long-term growth, Analysts’ forecasts, Market efficiency

JEL Classification: G14, M41