R&D, Innovation, and the Stock Market

Amit Goyal and Sunil Wahal
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Sunil Wahal: Arizona State University

No 23-107, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We investigate the relation between inventive input (R&D), inventive output (the economic value of patents, EVP), firm-level profitability and asset growth, and stock returns. Current R&D and EVP forecast future profitability. Neither forecast future asset growth. Factor models motivated by q-theory and the dividend discount model fail to price R&D and EVP correctly, leaving large alphas on the table. But model failure is due to design specifics, not economic underpinnings: using cash-based operating profitability to measure expected profitability resurrects both models. The stock market does not appear to misprice inventive input or output.

Keywords: Research & Development; Patents; Innovation; Intangibles; Profitability; Asset Pricing; Expected Returns; Accruals (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Pages: 63 pages
Date: 2023-11
New Economics Papers: this item is included in nep-fdg, nep-ino, nep-sbm and nep-tid
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp23107

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