Innovative Originality, Profitability, and Stock Returns

77 Pages Posted: 30 May 2017 Last revised: 8 Jun 2017

See all articles by David A. Hirshleifer

David A. Hirshleifer

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

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: May 2017

Abstract

We propose that innovative originality (InnOrig) is a valuable organizational resource, and that owing to limited investor attention and skepticism of complexity, firms with greater InnOrig are undervalued. We find that firms’ InnOrig strongly predicts higher, more persistent, and less volatile profitability; and higher abnormal stock returns—findings that are robust to extensive controls. The return predictive power of InnOrig is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to InnOrig. This evidence suggests that innovative originality acts as a ‘competitive moat,’ and that the market undervalues InnOrig.

Suggested Citation

Hirshleifer, David A. and Hsu, Po-Hsuan and Li, Dongmei, Innovative Originality, Profitability, and Stock Returns (May 2017). NBER Working Paper No. w23432. Available at SSRN: https://ssrn.com/abstract=2976178

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

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

Dongmei Li

University of South Carolina - Darla Moore School of Business - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

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