What is the Value of an Innovation? Theory and Evidence on the Stock Market's Reaction to Innovation Announcements

61 Pages Posted: 8 Jan 2020

See all articles by Thomas J. Chemmanur

Thomas J. Chemmanur

Boston College - Carroll School of Management

Dongmei Li

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

Kevin Tseng

National Taiwan University - Department of Finance

Yu (Yvonne) Wang

Boston College

Date Written: December 15, 2019

Abstract

We analyze, theoretically and empirically, the effect of investor attention on the stock market reaction to innovation announcements and suggest how market-based measures of the economic value of patents can be enhanced. We develop a dynamic model with limited investor attention to show that, following the immediate market reaction to innovation announcements, there will also be a stock return drift: the magnitude of the announcement effect will be increasing while that of the post-announcement drift will be decreasing in investor attention. We test our model predictions using two different datasets: a matched sample of pharmaceutical industry patent grant and subsequent FDA drug approval announcements; and a general USPTO sample of patent grant announcements. We use the media coverage of innovation announcements as a proxy for the investor attention paid to them. Consistent with model predictions, we find the following. First, in our matched patent grant and drug approval analysis, the announcement effects of patent grant announcements are smaller than those of FDA drug approval announcements; the subsequent stock return drifts, however, are larger for patent grant announcements. Second, the announcement effect of patent grant announcements is increasing in investor attention while the subsequent stock return drift is decreasing in investor attention. Third, the stock-return drift following patent grant announcements has predictive power for the economic value of patents, over and above the information contained in the announcement effect. Finally, we show that a long-short trading strategy based on investor attention is profitable over the one-month period after patent grant announcements.

Keywords: Corporate Innovation, Investor Attention, Post-Announcement Stock Return Drift, Valuation of Innovation

JEL Classification: G14, G31, G41, O31

Suggested Citation

Chemmanur, Thomas J. and Li, Dongmei and Tseng, Kevin and Wang, Yu, What is the Value of an Innovation? Theory and Evidence on the Stock Market's Reaction to Innovation Announcements (December 15, 2019). Available at SSRN: https://ssrn.com/abstract=3504261 or http://dx.doi.org/10.2139/ssrn.3504261

Thomas J. Chemmanur (Contact Author)

Boston College - Carroll School of Management ( email )

Finance Department, 436 Fulton Hall
Carroll School of Management, Boston College
Chestnut Hill, MA 02467-3808
United States
617-552-3980 (Phone)
617-552-0431 (Fax)

HOME PAGE: http://https://www2.bc.edu/thomas-chemmanur/

Dongmei Li

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

1014 Greene Street
Columbia, SC 29208
United States

Kevin Tseng

National Taiwan University - Department of Finance ( email )

1, Sec. 4, Roosevelt Road
Taipei, 106
Taiwan

Yu Wang

Boston College ( email )

Chestnut Hill, MA
United States

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