Corporate Innovation and Returns
59 Pages Posted: 28 Oct 2019
Date Written: October 17, 2019
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
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