Technology and Return Predictability

Abstract

This paper finds significant predictability in stock returns across technology-linked firms. Using patent-holding information to identify firms’ technological linkage, we show that a long–short equity trading strategy sorted on lagged returns of technology-linked firms yields monthly alphas of around 105 basis points. The findings are robust to a number of specifications and are not driven by industry predictability, customer-supplier relationships, and strategic alliances. We provide supportive evidence that investors’ limited attention to technological linkages contributes to the return predictability across technology-linked firms. Our study uncovers technological relatedness as an important information linkage between firms.

Keywords: Technological Linkage, Stock Return Predictability, Limited Attention

JEL Classification: G11, G12, G14