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Future profitability and stock returns of innovative firms in Australia

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  • Bedford, Anna
  • Ma, Le
  • Ma, Nelson
  • Vojvoda, Kristina

Abstract

This paper examines the impact of innovation on future profitability and stock returns. We first replicate and confirm the findings of Hirshleifer et al. (2018) in the U.S. setting. Consistent with Hirshleifer et al. (2018) we find that innovation is associated with: (1) higher and more persistent profitability suggesting that more innovative firms are able to maintain a competitive advantage and (2) positive future stock returns suggesting mispricing of innovation in current share prices. When we extend these analyses to the Australian setting we continue to find that innovative firms experienced sustained profitability but unlike Hirshleifer et al. (2018) we find no evidence of mispricing. We argue that the general paucity of innovation in Australia and the two-tier registration system which allows investors to differentiate between the quality of patents, enable Australian investors to better price innovation.

Suggested Citation

  • Bedford, Anna & Ma, Le & Ma, Nelson & Vojvoda, Kristina, 2021. "Future profitability and stock returns of innovative firms in Australia," Pacific-Basin Finance Journal, Elsevier, vol. 66(C).
    • Handle: RePEc:eee:pacfin:v:66:y:2021:i:c:s0927538x21000159
    DOI: 10.1016/j.pacfin.2021.101508
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    References listed on IDEAS

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    1. Ernst, Holger, 2001. "Patent applications and subsequent changes of performance: evidence from time-series cross-section analyses on the firm level," Research Policy, Elsevier, vol. 30(1), pages 143-157, January.
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    4. Viral V. Acharya & Krishnamurthy V. Subramanian, 2009. "Bankruptcy Codes and Innovation," The Review of Financial Studies, Society for Financial Studies, vol. 22(12), pages 4949-4988, December.
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    6. David Hirshleifer & Po-Hsuan Hsu & Dongmei Li, 2018. "Innovative Originality, Profitability, and Stock Returns," The Review of Financial Studies, Society for Financial Studies, vol. 31(7), pages 2553-2605.
    7. Joshua Lerner, 1994. "The Importance of Patent Scope: An Empirical Analysis," RAND Journal of Economics, The RAND Corporation, vol. 25(2), pages 319-333, Summer.
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    9. Fama, Eugene F & MacBeth, James D, 1973. "Risk, Return, and Equilibrium: Empirical Tests," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 607-636, May-June.
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    Cited by:

    1. Yihao Tian & Lijin Ding & Bin Yang & Feng Peng, 2022. "The Effects of De-Capacity Policy on Steel and Coal Firms’ Profitability: Evidence from China’s Listed Companies," Energies, MDPI, vol. 15(12), pages 1-17, June.
    2. Bedford, Anna & Ma, Le & Ma, Nelson & Vojvoda, Kristina, 2022. "Australian innovation: Patent database construction and first evidence," Pacific-Basin Finance Journal, Elsevier, vol. 73(C).
    3. Akhmadi Akhmadi & Yeni Januarsi, 2021. "Profitability and Firm Value: Does Dividend Policy Matter for Indonesian Sustainable and Responsible Investment (SRI)-KEHATI Listed Firms?," Economies, MDPI, vol. 9(4), pages 1-23, November.

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