Don’t Hide Your Light Under a Bushel: Innovative Originality and Stock Returns

David Hirshleifer, Po-Hsuan Hsu and Dongmei Li

MPRA Paper from University Library of Munich, Germany

Abstract: We propose that owing to limited investor attention and skepticism of complexity, firms with greater innovative originality (IO) will be undervalued, especially for firms with higher valuation uncertainty, lower attention, and greater sensitivity of future profitability to IO. We find that IO strongly positively predicts firms’ profitability and abnormal stock returns, especially among those firms suggested by the model. The return predictive power of IO is robust to extensive asset pricing controls, to an alternative IO measure, and across sample periods. Although we do not rule out risk-based explanations, the most plausible interpretation of the evidence is that the market undervalues IO.

Keywords: Limited attention; Market efficiency; Processing fluency; Innovative originality; Complexity; Ambiguity aversion (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G14 O3 O32 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-cfn
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Citations: View citations in EconPapers (1)

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