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The Return to Independent Invention: Evidence of Unrealistic Optimism, Risk Seeking or Skewness Loving?

  • Thomas Astebro

    (University of Waterloo)

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    Examining a sample of 1,091 inventions I investigate the magnitude and distribution of the pretax internal rate of return (IRR) to inventive activity. The average IRR on a portfolio investment in these inventions is 11.4%. This is higher than the risk--free rate but lower than the long--run return on high--risk securities and the long--run return on early--stage venture capital funds. The portfolio IRR is significantly higher, for some ex ante identifiable classes of inventions. The distribution of return is skew: only between 7--9% reach the market. Of the 75 inventions that did, six realised returns above 1400%, 60% obtained negative returns and the median was negative. Copyright Royal Economic Society 2003.

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    Article provided by Royal Economic Society in its journal The Economic Journal.

    Volume (Year): 113 (2003)
    Issue (Month): 484 (January)
    Pages: 226-239

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    Handle: RePEc:ecj:econjl:v:113:y:2003:i:484:p:226-239
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    1. Cochrane, John H., 2005. "The risk and return of venture capital," Journal of Financial Economics, Elsevier, vol. 75(1), pages 3-52, January.
    2. Evans, David S & Jovanovic, Boyan, 1989. "An Estimated Model of Entrepreneurial Choice under Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 808-27, August.
    3. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    4. William E. Souder, 1973. "Utility and Perceived Acceptability of R&D Project Selection Models," Management Science, INFORMS, vol. 19(12), pages 1384-1394, August.
    5. F. M. Scherer, 1998. "The Size Distribution of Profits from Innovation," Annales d'Economie et de Statistique, ENSAE, issue 49-50, pages 495-516.
    6. F. M. Scherer & Dietmar Harhoff & J, rg Kukies, 2000. "Uncertainty and the size distribution of rewards from innovation," Journal of Evolutionary Economics, Springer, vol. 10(1), pages 175-200.
    7. de Meza, David & Southey, Clive, 1996. "The Borrower's Curse: Optimism, Finance and Entrepreneurship," Economic Journal, Royal Economic Society, vol. 106(435), pages 375-86, March.
    8. Mansfield, Edwin, et al, 1977. "Social and Private Rates of Return from Industrial Innovations," The Quarterly Journal of Economics, MIT Press, vol. 91(2), pages 221-40, May.
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