Stock Market Overvaluation, Moon Shots, and Corporate Innovation

64 Pages Posted: 3 Dec 2016 Last revised: 30 Jan 2019

See all articles by Ming Dong

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 24, 2019

Abstract

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is very strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as well as R&D and innovative output (patent and citation counts), and these relationships are highly convex in overvaluation. Misvaluation affects R&D more via a non-equity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation is increasing with growth 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 (January 24, 2019). 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)
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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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