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Innovative Originality, Profitability, and Stock Returns

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  • David Hirshleifer
  • Po-Hsuan Hsu
  • Dongmei Li

Abstract

We propose that innovative originality is a valuable organizational resource and that owing to limited investor attention and skepticism of complexity, greater innovative originality may be undervalued. We find that firms’ innovative originality strongly predicts higher, more persistent, and less volatile profitability and higher abnormal stock returns, findings that are robust to extensive controls. The return predictive power of innovative originality is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to innovative originality. This evidence suggests that innovative originality acts as a “competitive moat” and is undervalued by the market. Received November 5, 2015; editorial decision June 12, 2017 by Editor Andrew Karolyi.

Suggested Citation

  • David Hirshleifer & Po-Hsuan Hsu & Dongmei Li, 2018. "Innovative Originality, Profitability, and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2553-2605.
    • Handle: RePEc:oup:rfinst:v:31:y:2018:i:7:p:2553-2605.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhx101
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    JEL classification:

    • 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
    • G3 - Financial Economics - - Corporate Finance and Governance

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