Stock Market Overvaluation, Moon Shots, and Corporate Innovation

63 Pages Posted: 3 Dec 2016  

Ming Dong

York University - Schulich School of Business

David A. Hirshleifer

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

Siew Hong Teoh

University of California - Irvine - Accounting Area

Date Written: July 15, 2018

Abstract

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is very strongly associated with R&D, innovative output, and measures of innovative novelty, originality, and scope. R&D is much more sensitive than capital investment to overvaluation. Misvaluation affects R&D more via a non-equity channel than via equity issuance. We document how the sensitivity of R&D and innovative outcomes to misvaluation depends on growth, overvaluation, and turnover. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and by encouraging firms to engage in ‘moon shots.’

Keywords: Stock Market Misvaluation, Innovation, R&D, Patents, Behavioral Finance, Market Efficiency

JEL Classification: G14, G32, O32

Suggested Citation

Dong, Ming and Hirshleifer, David A. and Teoh, Siew Hong, Stock Market Overvaluation, Moon Shots, and Corporate Innovation (July 15, 2018). Available at SSRN: https://ssrn.com/abstract=2878418 or http://dx.doi.org/10.2139/ssrn.2878418

Ming Dong

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext. 77945 (Phone)
416-736-5687 (Fax)

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

Siew Hong Teoh

University of California - Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

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