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How Speculation Affects the Market and Outcome-Based Values of Innovation

Author

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  • Valentin Haddad
  • Erik Loualiche

Abstract

nnovation booms often coincide with speculative bubbles. Using data on over 1 million patents, we document two ways in which speculation creates a disconnect between the market valuation of innovation and its actual economic impact. First, an innovation during bubbles raises the stock price of its creator by 40 percent more than is justified by future outcomes. Next, competitors' stock prices move little during bubbles despite their profits suffering. We present a theory of investor disagreement about which firms will succeed that reconciles both facts. Policymakers should account for the disconnect.

Suggested Citation

  • Valentin Haddad & Erik Loualiche, 2022. "How Speculation Affects the Market and Outcome-Based Values of Innovation," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, vol. 22(35), August.
    • Handle: RePEc:fip:fedreb:94686
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