Journal of Financial Economics Vol. 107 No. 3 2013

Innovative efficiency and stock returns

David Hirshleifer¹; Po-Hsuan Hsu^2,3; Dongmei Li^4,5

¹ University of California, Irvine · ² University of Hong Kong · ³ Guangdong University Of Finances and Economics · ⁴ University of California System · ⁵ University of California San Diego

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.

DOI

10.1016/j.jfineco.2012.09.011

Volume

107

Issue

3

Pages

632-654

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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