Corporate Innovation and Returns[Last-in first-out oligopoly dynamics]

Among U.S. public firms, technological innovation is concentrated on a small set of large players, with innovation “leaders” having considerably lower systematic risk than “laggards.” To understand this fact, we build a winner-takes-all patent race model and show that a firm’s expected return decreases in its innovation output and increases in that of its rivals. Using a comprehensive firm-level panel of information on patenting activity by fields of technology in 1950–2010, we find strong support for the model’s predictions. Our results highlight that strategic interactions among firms competing in innovation are an important determinant of risk and expected returns. (JEL G12, G31)Received August 6, 2018; editorial decision October 19, 2019 by Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.