IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/29917.html
   My bibliography  Save this paper

Bubbles and the Value of Innovation

Author

Listed:
  • Valentin Haddad
  • Paul Ho
  • Erik Loualiche

Abstract

Booming innovation often coincides with intense speculation in financial markets. Using over a million patents, we document two ways the market valuation of innovation and its economic impact become disconnected during bubbles. Specifically, an innovation raises the stock price of its creator by 40% more than is justified by future outcomes. In contrast, competitors’ stock prices move little despite their profits suffering. We develop a theory of investor disagreement about which firms will succeed that reconciles both the facts, unlike existing models of bubbles. Optimal innovation policy during bubbles must account for the disconnect.

Suggested Citation

  • Valentin Haddad & Paul Ho & Erik Loualiche, 2022. "Bubbles and the Value of Innovation," NBER Working Papers 29917, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:29917
    Note: AP CF EFG PR
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w29917.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. David Hirshleifer & Joshua B. Plotkin, 2021. "Moonshots, investment booms, and selection bias in the transmission of cultural traits," Proceedings of the National Academy of Sciences, Proceedings of the National Academy of Sciences, vol. 118(26), pages 2015571118-, June.
    2. Alberto Martin & Jaume Ventura, 2012. "Economic Growth with Bubbles," American Economic Review, American Economic Association, vol. 102(6), pages 3033-3058, October.
    3. Mokyr, Joel, 1992. "The Lever of Riches: Technological Creativity and Economic Progress," OUP Catalogue, Oxford University Press, number 9780195074772.
    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. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
    6. Eduardo Dávila, 2023. "Optimal Financial Transaction Taxes," Journal of Finance, American Finance Association, vol. 78(1), pages 5-61, February.
    7. Adam Jørring & Andrew W Lo & Tomas J Philipson & Manita Singh & Richard T Thakor, 2022. "Sharing R&D Risk in Healthcare via FDA Hedges [Bank lines of credit as contingent liquidity: Covenant violations and their implications]," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 11(4), pages 880-922.
    8. Eduardo Dávila & Ansgar Walther, 2023. "Prudential Policy with Distorted Beliefs," American Economic Review, American Economic Association, vol. 113(7), pages 1967-2006, July.
    9. Nicholas Bloom & Mark Schankerman & John Van Reenen, 2013. "Identifying Technology Spillovers and Product Market Rivalry," Econometrica, Econometric Society, vol. 81(4), pages 1347-1393, July.
    10. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    11. Leonid Kogan & Dimitris Papanikolaou & Amit Seru & Noah Stoffman, 2017. "Technological Innovation, Resource Allocation, and Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 132(2), pages 665-712.
    12. Felipe S. Iachan & Plamen T. Nenov & Alp Simsek, 2021. "The Choice Channel of Financial Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 333-372, April.
    13. Barberis, Nicholas & Greenwood, Robin & Jin, Lawrence & Shleifer, Andrei, 2018. "Extrapolation and bubbles," Journal of Financial Economics, Elsevier, vol. 129(2), pages 203-227.
    14. Hellwig, Martin & Irmen, Andreas, 2001. "Endogenous Technical Change in a Competitive Economy," Journal of Economic Theory, Elsevier, vol. 101(1), pages 1-39, November.
    15. Darrell Duffie, 2014. "Challenges to a Policy Treatment of Speculative Trading Motivated by Differences in Beliefs," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 173-182.
    16. Scott, William Robert, 1912. "Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 1, number scott1912a.
    17. Ana Fostel & John Geanakoplos, 2016. "Financial Innovation, Collateral, and Investment," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(1), pages 242-284, January.
    18. Luboš Pástor & Pietro Veronesi, 2009. "Technological Revolutions and Stock Prices," American Economic Review, American Economic Association, vol. 99(4), pages 1451-1483, September.
    19. Tom Nicholas, 2008. "Does Innovation Cause Stock Market Runups? Evidence from the Great Crash," American Economic Review, American Economic Association, vol. 98(4), pages 1370-1396, September.
    20. Adam V. Reed & Pedro A. C. Saffi & Edward D. Van Wesep, 2021. "Short-Sales Constraints and the Diversification Puzzle," Management Science, INFORMS, vol. 67(2), pages 1159-1182, February.
    21. Jones, Charles M. & Lamont, Owen A., 2002. "Short-sale constraints and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 207-239.
    22. Leonid Kogan & Dimitris Papanikolaou & Lawrence D. W. Schmidt & Jae Song, 2020. "Technological Innovation and Labor Income Risk," Working Papers, Center for Retirement Research at Boston College 202010, Center for Retirement Research.
    23. Dietmar Harhoff & Francis Narin & F. M. Scherer & Katrin Vopel, 1999. "Citation Frequency And The Value Of Patented Inventions," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 511-515, August.
    24. Scott, William Robert, 1912. "Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 3, number scott1912c.
    25. Pakes, Ariel, 1985. "On Patents, R&D, and the Stock Market Rate of Return," Journal of Political Economy, University of Chicago Press, vol. 93(2), pages 390-409, April.
    26. Markus K. Brunnermeier & Alp Simsek & Wei Xiong, 2014. "A Welfare Criterion For Models With Distorted Beliefs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 129(4), pages 1753-1797.
    27. ÅžimÅŸek, Alp, 2021. "The Macroeconomics of Financial Speculation," CEPR Discussion Papers 15733, C.E.P.R. Discussion Papers.
    28. Jaffe, Adam B, 1986. "Technological Opportunity and Spillovers of R&D: Evidence from Firms' Patents, Profits, and Market Value," American Economic Review, American Economic Association, vol. 76(5), pages 984-1001, December.
    29. Broer, Tobias, 2018. "Securitization bubbles: Structured finance with disagreement about default risk," Journal of Financial Economics, Elsevier, vol. 127(3), pages 505-518.
    30. Huang, Shiyang & Hwang, Byoung-Hyoun & Lou, Dong & Yin, Chengxi, 2020. "Offsetting disagreement and security prices," LSE Research Online Documents on Economics 101135, London School of Economics and Political Science, LSE Library.
    31. Leonid Kogan & Dimitris Papanikolaou & Noah Stoffman, 2020. "Left Behind: Creative Destruction, Inequality, and the Stock Market," Journal of Political Economy, University of Chicago Press, vol. 128(3), pages 855-906.
    32. Ralph S. J. Koijen & Motohiro Yogo, 2019. "A Demand System Approach to Asset Pricing," Journal of Political Economy, University of Chicago Press, vol. 127(4), pages 1475-1515.
    33. Janeway,William H., 2012. "Doing Capitalism in the Innovation Economy," Cambridge Books, Cambridge University Press, number 9781107031258.
    34. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    35. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
    36. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    37. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
    38. Pakes, Ariel S, 1986. "Patents as Options: Some Estimates of the Value of Holding European Patent Stocks," Econometrica, Econometric Society, vol. 54(4), pages 755-784, July.
    39. Alp Simsek, 2013. "Speculation and Risk Sharing with New Financial Assets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 128(3), pages 1365-1396.
    40. Harrison Hong & Jeremy C. Stein, 2007. "Disagreement and the Stock Market," Journal of Economic Perspectives, American Economic Association, vol. 21(2), pages 109-128, Spring.
    41. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    42. Jose A. Scheinkman & Wei Xiong, 2003. "Overconfidence and Speculative Bubbles," Journal of Political Economy, University of Chicago Press, vol. 111(6), pages 1183-1219, December.
    43. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(2), pages 227-253, October.
    44. Marc J. Melitz, 2003. "The Impact of Trade on Intra-Industry Reallocations and Aggregate Industry Productivity," Econometrica, Econometric Society, vol. 71(6), pages 1695-1725, November.
    45. Howard Kung & Lukas Schmid, 2015. "Innovation, Growth, and Asset Prices," Journal of Finance, American Finance Association, vol. 70(3), pages 1001-1037, June.
    46. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    47. Tirole, Jean, 1985. "Asset Bubbles and Overlapping Generations," Econometrica, Econometric Society, vol. 53(6), pages 1499-1528, November.
    48. Alp Simsek, 2021. "The Macroeconomics of Financial Speculation," Annual Review of Economics, Annual Reviews, vol. 13(1), pages 335-369, August.
    49. Alp Simsek, 2021. "The Macroeconomics of Financial Speculation," NBER Working Papers 28426, National Bureau of Economic Research, Inc.
    50. Zvi Griliches & Ariel Pakes & Bronwyn H. Hall, 1986. "The Value of Patents as Indicators of Inventive Activity," NBER Working Papers 2083, National Bureau of Economic Research, Inc.
    51. Gârleanu, Nicolae & Kogan, Leonid & Panageas, Stavros, 2012. "Displacement risk and asset returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 491-510.
    52. Scott, William Robert, 1912. "Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number scott1912b.
    53. J. Michael Harrison & David M. Kreps, 1978. "Speculative Investor Behavior in a Stock Market with Heterogeneous Expectations," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 92(2), pages 323-336.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. ÅžimÅŸek, Alp, 2021. "The Macroeconomics of Financial Speculation," CEPR Discussion Papers 15733, C.E.P.R. Discussion Papers.
    2. Qin, Meng & Mirza, Nawazish & Su, Chi-Wei & Umar, Muhammad, 2023. "Exploring Bubbles in the Digital Economy: The Case of China," Global Finance Journal, Elsevier, vol. 57(C).
    3. Eduardo Dávila & Ansgar Walther, 2023. "Prudential Policy with Distorted Beliefs," American Economic Review, American Economic Association, vol. 113(7), pages 1967-2006, July.
    4. Hiroatsu Tanaka, 2022. "Equilibrium Yield Curves with Imperfect Information," Finance and Economics Discussion Series 2022-086, Board of Governors of the Federal Reserve System (U.S.).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. ÅžimÅŸek, Alp, 2021. "The Macroeconomics of Financial Speculation," CEPR Discussion Papers 15733, C.E.P.R. Discussion Papers.
    2. Eduardo Dávila, 2023. "Optimal Financial Transaction Taxes," Journal of Finance, American Finance Association, vol. 78(1), pages 5-61, February.
    3. Brunnermeier, Markus K. & Oehmke, Martin, 2013. "Bubbles, Financial Crises, and Systemic Risk," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1221-1288, Elsevier.
    4. Michael Bailey & Ruiqing Cao & Theresa Kuchler & Johannes Stroebel, 2016. "Social Networks and Housing Markets," NBER Working Papers 22258, National Bureau of Economic Research, Inc.
    5. Felipe S. Iachan & Plamen T. Nenov & Alp Simsek, 2021. "The Choice Channel of Financial Innovation," American Economic Journal: Macroeconomics, American Economic Association, vol. 13(2), pages 333-372, April.
    6. Florian Schuster & Marco Wysietzki & Jonas Zdrzalek, 2023. "How Heterogeneous Beliefs Trigger Financial Crises," ECONtribute Discussion Papers Series 238, University of Bonn and University of Cologne, Germany.
    7. Tseng, Kevin, 2022. "Learning from the Joneses: Technology spillover, innovation externality, and stock returns," Journal of Accounting and Economics, Elsevier, vol. 73(2).
    8. Ricardo J Caballero & Alp Simsek, 2020. "A Risk-Centric Model of Demand Recessions and Speculation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 135(3), pages 1493-1566.
    9. Bordalo, Pedro & Gennaioli, Nicola & Kwon, Spencer Yongwook & Shleifer, Andrei, 2021. "Diagnostic bubbles," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1060-1077.
    10. Daniel Andrei & Bruce I. Carlin, 2017. "Asset Pricing in the Quest for the New El Dorado," NBER Working Papers 23455, National Bureau of Economic Research, Inc.
    11. Ricardo J. Caballero & Alp Simsek, 2019. "Prudential Monetary Policy," NBER Working Papers 25977, National Bureau of Economic Research, Inc.
    12. Li, Xiaogang, 2020. "Innovation, market valuations, policy uncertainty and trade: Theory and evidence," ISU General Staff Papers 202001010800009179, Iowa State University, Department of Economics.
    13. Arzu Uluc, 2018. "Stabilising House Prices: the Role of Housing Futures Trading," The Journal of Real Estate Finance and Economics, Springer, vol. 56(4), pages 587-621, May.
    14. Julien Pénasse & Luc Renneboog, 2022. "Speculative Trading and Bubbles: Evidence from the Art Market," Management Science, INFORMS, vol. 68(7), pages 4939-4963, July.
    15. Greenwood, Robin & Shleifer, Andrei & You, Yang, 2019. "Bubbles for Fama," Journal of Financial Economics, Elsevier, vol. 131(1), pages 20-43.
    16. Gadi Barlevy, 2015. "Bubbles and Fools," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q II.
    17. Wei Xiong, 2013. "Bubbles, Crises, and Heterogeneous Beliefs," NBER Working Papers 18905, National Bureau of Economic Research, Inc.
    18. Eom, Yunsung, 2021. "Kimchi premium and speculative trading in bitcoin," Finance Research Letters, Elsevier, vol. 38(C).
    19. Thorsten Lehnert, 2020. "Fear and stock price bubbles," PLOS ONE, Public Library of Science, vol. 15(5), pages 1-17, May.
    20. Enders, Zeno & Hakenes, Hendrik Hakenes, 2014. "On the Existence and Prevention of Speculative Bubbles," Working Papers 0567, University of Heidelberg, Department of Economics.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G4 - Financial Economics - - Behavioral Finance
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:29917. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.