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Don’t Hide Your Light Under a Bushel: Innovative Originality and Stock Returns

Author

Listed:
  • Hirshleifer, David
  • hsu, po-hsuan
  • li, dongmei

Abstract

We propose that owing to limited investor attention and skepticism of complexity, firms with greater innovative originality (IO) will be undervalued, especially for firms with higher valuation uncertainty, lower attention, and greater sensitivity of future profitability to IO. We find that IO strongly positively predicts firms’ profitability and abnormal stock returns, especially among those firms suggested by the model. The return predictive power of IO is robust to extensive asset pricing controls, to an alternative IO measure, and across sample periods. Although we do not rule out risk-based explanations, the most plausible interpretation of the evidence is that the market undervalues IO.

Suggested Citation

  • Hirshleifer, David & hsu, po-hsuan & li, dongmei, 2014. "Don’t Hide Your Light Under a Bushel: Innovative Originality and Stock Returns," MPRA Paper 59835, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:59835
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    File URL: https://mpra.ub.uni-muenchen.de/59835/1/MPRA_paper_59835.pdf
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    Cited by:

    1. Oh, Jong-Min, 2017. "Absorptive capacity, technology spillovers, and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 85(C), pages 146-164.

    More about this item

    Keywords

    Limited attention; Market efficiency; Processing fluency; Innovative originality; Complexity; Ambiguity aversion;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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