Innovation links, information diffusion, and return predictability: Evidence from China

Kailin Zeng, Ting Tang, Fangbiao Liu and Ebenezer Fiifi Emire Atta Mills

International Review of Financial Analysis, 2022, vol. 83, issue C

Abstract: Based on the activities of patent citation in China, a novel type of cross-firm innovation links is generated to investigate the gradual diffusion of information along the innovation chain via tests of cross-sectional return predictability. Various signals are created to represent the value of the information contained in the innovation links; these signals are demonstrated to have robust cross-predictability for stock returns in both the cross-sectional regression model and portfolio strategies. The effect of predictability is found to be stronger for stocks with high institutional ownership and analyst coverage. Considering the minimum number of steps required to establish the cross-firm linkage, innovation links are further partitioned to represent different proximity of the linked firms. It is then found that information diffuses faster across closely-linked firms than across distantly-linked firms. Sophisticated investors are found to be able to properly process the relevant information and benefit from innovation links.

Keywords: Innovation link; Patent citation; Information diffusion; Return predictability (search for similar items in EconPapers)
JEL-codes: D81 E44 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:83:y:2022:i:c:s1057521922001867

DOI: 10.1016/j.irfa.2022.102225

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