Learning from the Joneses: Technology spillover, innovation externality, and stock returns

This paper provides empirical evidence for the role of technology spillover, an important innovation externality, in asset pricing. Using patent and R&D data, I show that firms with more technology spillover earn 7.7% higher annualized returns than firms with less technology spillover. Exploiting three quasi-natural experiments, I find that the return effect is strengthened (attenuated) when there is a plausibly exogenous increase (decrease) in the flow of technological information across firms. I also find that firms with more technology spillover have higher cash flow sensitivity to aggregate consumption, numbers of new products, and stock return synchronicity. These findings are consistent with models on learning about new technology; specifically, spillover enables learning about new technology to facilitate timely and large-scale adoption of new technology, which in turn exposes spillover recipients to additional systematic risk. These findings highlight the influence of innovation externality on stock returns.