Review of Financial Studies Vol. 31 No. 7 2018

Innovative Originality, Profitability, and Stock Returns

David Hirshleifer¹; Po-Hsuan Hsu²; Dongmei Li³

¹ Paul Merage School of Business, University of California, Irvine and NBER · ² Faculty of Business and Economics, University of Hong Kong · ³ Darla Moore School of Business, University of South Carolina

Abstract

We propose that innovative originality is a valuable organizational resource and that owing to limited investor attention and skepticism of complexity, greater innovative originality may be undervalued. We find that firms' innovative originality 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 innovative originality is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to innovative originality. This evidence suggests that innovative originality acts as a "competitive moat" and is undervalued by the market.

DOI

10.1093/rfs/hhx101

Volume

31

Issue

7

Pages

2553-2605

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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