Uncertainty, Investor Sentiment, and Innovation

Was Prometheus unbound by chance? Risk, diversification, and growth

David Dicks and Paolo Fulghieri

The Review of Financial Studies, 2021, vol. 34, issue 3, 1236-1279

Abstract: We develop a theory of innovation waves, investor sentiment, and merger activity based on Knightian uncertainty. Uncertainty-averse investors are more optimistic on an innovation when they can make contemporaneous investments in multiple uncertain projects. Innovation waves occur when there is a critical mass of innovative companies, and are characterized by stronger investor sentiment, higher equity valuation, and hot initial public offering markets. Our approach to investor sentiment is not based on erroneous beliefs disjoint from economic fundamentals, but depends on uncertainty on the fundamentals. Our model can explain sector-specific booms uncorrelated with aggregate economic activity and the overall stock market.

JEL-codes: D81 G34 O31 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (8)

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