Misvaluation and Corporate Inventiveness

Journal of Financial and Quantitative Analysis

67 Pages Posted: 3 Dec 2016 Last revised: 26 Jun 2020

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; National Bureau of Economic Research (NBER)

Siew Hong Teoh

UCLA Anderson School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: February 16, 2020

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). Misvaluation affects R&D more via a non-equity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation is increasing with share turnover and overvaluation. 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 highly inventive innovation.

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, Misvaluation and Corporate Inventiveness (February 16, 2020). Journal of Financial and Quantitative Analysis, 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 )

Paul Merage School of Business
Irvine, CA California 92697-3125
United States

HOME PAGE: http://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Siew Hong Teoh

UCLA Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

HOME PAGE: http://www.anderson.ucla.edu/faculty-and-research/accounting/faculty/teoh

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