Technological Links and Predictable Returns

71 Pages Posted: 14 Sep 2017 Last revised: 13 Mar 2018

See all articles by Charles M.C. Lee

Charles M.C. Lee

Stanford University - Graduate School of Business

Stephen Teng Sun

City University of Hong Kong (CityUHK) - Department of Accountancy

Rongfei Wang

Peking University - Guanghua School of Management

Ran Zhang

Guanghua School of Management

Date Written: March 7, 2018

Abstract

Employing a classic measure of technological closeness between firms, we show that the returns of technology-linked firms have strong predictive power for focal firm returns. A long-short strategy based on this effect yields monthly alpha of 117 basis points. This effect is distinct from industry momentum and is not easily attributable to risk-based explanations. It is more pronounced for focal firms that: (a) have a more intense and specific technology focus, (b) receive lower investor attention, and (c) are more difficult to arbitrage. Our results are broadly consistent with sluggish price adjustment to more nuanced technological news.

Keywords: Technology Momentum, Stock Returns, Return Predictability, Patents, Technological Closeness, Limited Attention, Market Efficiency

JEL Classification: G10, G11, G14, O30

Suggested Citation

Lee, Charles M.C. and Sun, Stephen Teng and Wang, Rongfei and Zhang, Ran, Technological Links and Predictable Returns (March 7, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3036241 or http://dx.doi.org/10.2139/ssrn.3036241

Charles M.C. Lee (Contact Author)

Stanford University - Graduate School of Business ( email )

Stanford Graduate School of Business
655 Knight Way
Stanford, CA 94305-5015
United States
650-721-1295 (Phone)

Stephen Teng Sun

City University of Hong Kong (CityUHK) - Department of Accountancy ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong
China

Rongfei Wang

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Ran Zhang

Guanghua School of Management ( email )

Beijing, 100871
China
86-10-62756911 (Phone)

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