Innovative efficiency and stock returns

David Hirshleifer, Po-Hsuan Hsu and Dongmei Li ()

Journal of Financial Economics, 2013, vol. 107, issue 3, 632-654

Abstract: We find that innovative efficiency (IE), patents or citations scaled by research and development expenditures, is a strong positive predictor of future returns after controlling for firm characteristics and risk. The IE-return relation is associated with the loading on a mispricing factor, and the high Sharpe ratio of the Efficient Minus Inefficient (EMI) portfolio suggests that mispricing plays an important role. Further tests based upon attention and uncertainty proxies suggest that limited attention contributes to the effect. The high weight of the EMI portfolio return in the tangency portfolio suggests that IE captures incremental pricing effects relative to well-known factors.

Keywords: Innovative efficiency; Limited attention; Research and development; Market efficiency (search for similar items in EconPapers)
JEL-codes: G12 G14 O32 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (289)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:107:y:2013:i:3:p:632-654

DOI: 10.1016/j.jfineco.2012.09.011

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