Corporate Innovation and Returns

Abstract

Among U.S. public firms, technological innovation is concentrated in a small set of large players, with innovation “leaders” having considerably lower systematic risk than “laggards.” To understand this fact, we build a winner-takes-all patent-race model and show that a firm’s expected return decreases in its innovation output and increases in that of its rivals. Using a comprehensive firm-level panel of information on patenting activity by fields of technology in 1950-2010, we find strong support for the model’s predictions. Our results highlight that strategic interactions among firms competing in innovation are an important determinant of risk and expected returns.

Keywords: Competition in innovation, Patent races, Cross section of returns, Cost of capital

JEL Classification: G12, G14