Innovative Originality, Profitability, and Stock Returns

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

No 23432, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We propose that innovative originality (InnOrig) is a valuable organizational resource, and that owing to limited investor attention and skepticism of complexity, firms with greater InnOrig are undervalued. We find that firms’ InnOrig strongly predicts higher, more persistent, and less volatile profitability; and higher abnormal stock returns—findings that are robust to extensive controls. The return predictive power of InnOrig is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to InnOrig. This evidence suggests that innovative originality acts as a ‘competitive moat,’ and that the market undervalues InnOrig.

JEL-codes: G12 G14 G3 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-cfn, nep-dcm and nep-fmk
Note: AP CF
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Citations: View citations in EconPapers (14)

Published as David Hirshleifer & Po-Hsuan Hsu & Dongmei Li, 2018. "Innovative Originality, Profitability, and Stock Returns," The Review of Financial Studies, vol 31(7), pages 2553-2605.

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