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R&D, patents and stock return volatility

Author

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  • Mariana Mazzucato

    ()

  • Massimiliano Tancioni

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Abstract

Recent finance literature highlights the role of technological change in increasing firm specific (idiosyncratic) and aggregate stock return volatility, yet innovation data is not used in these analyses, leaving the direct relationship between innovation and stock return volatility untested. The paper investigates the relationship between volatility and innovation using firm level patent data. The analysis builds on the empirical work by Mazzucato (Rev Econ Dyn 5:318–345, 2002 ; J Evol Econ 13(5):491–512, 2003 ) where it is found that stock return volatility is highest during periods in the industry life-cycle when innovation is the most ‘radical’. In this paper we ask whether firms which invest more in innovation (more R&D and more patents) and/or which have more important innovations (patents with more citations) experience more volatility in their returns. Given that returns should in theory be higher, on average, for higher risk stocks, we also look at the effect of innovation on the level of returns. To take into account the competition between firms within industries, firm returns and volatility are measured relative to the industry average. We focus the analysis on firms in the pharmaceutical industry between 1974 and 1999. Results suggest that there is a positive and significant relationship between volatility, R&D intensity and the various patent related measures—especially when the innovation measures are filtered to distinguish the very innovative firms from the less innovate ones. Copyright Springer-Verlag 2012

Suggested Citation

  • Mariana Mazzucato & Massimiliano Tancioni, 2012. "R&D, patents and stock return volatility," Journal of Evolutionary Economics, Springer, vol. 22(4), pages 811-832, September.
  • Handle: RePEc:spr:joevec:v:22:y:2012:i:4:p:811-832
    DOI: 10.1007/s00191-012-0289-x
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    References listed on IDEAS

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    1. John Y. Campbell, 2001. "Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk," Journal of Finance, American Finance Association, vol. 56(1), pages 1-43, February.
    2. Bresnahan, Timothy F & Greenstein, Shane, 1999. "Technological Competition and the Structure of the Computer Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 47(1), pages 1-40, March.
    3. Pastor, Lubos & Veronesi, Pietro, 2006. "Was there a Nasdaq bubble in the late 1990s?," Journal of Financial Economics, Elsevier, vol. 81(1), pages 61-100, July.
    4. Bronwyn H. Hall & Adam Jaffe & Manuel Trajtenberg, 2005. "Market Value and Patent Citations," RAND Journal of Economics, The RAND Corporation, vol. 36(1), pages 16-38, Spring.
    5. Yi Deng, 2005. "The value of knowledge spillovers," Working Paper Series 2005-14, Federal Reserve Bank of San Francisco.
    6. Schwert, G William, 1989. " Why Does Stock Market Volatility Change over Time?," Journal of Finance, American Finance Association, vol. 44(5), pages 1115-1153, December.
    7. Gambardella,Alfonso, 1995. "Science and Innovation," Cambridge Books, Cambridge University Press, number 9780521451185, May.
    8. Stephen Hymer & Peter Pashigian, 1962. "Firm Size and Rate of Growth," Journal of Political Economy, University of Chicago Press, vol. 70, pages 556-556.
    9. Mariana Mazzucato, 2002. "The PC Industry: New Economy or Early Life-Cycle?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(2), pages 318-345, April.
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    Citations

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    Cited by:

    1. Lei Gao & Leo L. Yang & Joseph H. Zhang, 2016. "Corporate patents, R&D success, and tax avoidance," Review of Quantitative Finance and Accounting, Springer, vol. 47(4), pages 1063-1096, November.
    2. Sara Amoroso & Pietro Moncada-Paternò-Castello & Antonio Vezzani, 2017. "R&D profitability: the role of risk and Knightian uncertainty," Small Business Economics, Springer, vol. 48(2), pages 331-343, February.
    3. repec:kap:jtecht:v:42:y:2017:i:6:d:10.1007_s10961-016-9515-2 is not listed on IDEAS
    4. repec:eee:tefoso:v:120:y:2017:i:c:p:204-222 is not listed on IDEAS
    5. Giovanni Dosi & Valérie Revest & Alessandro Sapio, 2016. "Financial regimes, financialization patterns and industrial performances : preliminary remarks," Post-Print halshs-01418040, HAL.
    6. Brigitte Eierle & Simone Wencki, 2016. "The determinants of capitalising development costs in private companies: evidence from Germany," Journal of Business Economics, Springer, vol. 86(3), pages 259-300, April.

    More about this item

    Keywords

    Idiosyncratic risk; Volatility; Technological change; Industry life-cycle; G12; 030;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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