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Uncertainty, Investor Sentiment, and Innovation
[Was Prometheus unbound by chance? Risk, diversification, and growth]

Author

Listed:
  • David Dicks
  • Paolo Fulghieri

Abstract

We develop a theory of innovation waves, investor sentiment, and merger activity based on Knightian uncertainty. Uncertainty-averse investors are more optimistic on an innovation when they can make contemporaneous investments in multiple uncertain projects. Innovation waves occur when there is a critical mass of innovative companies, and are characterized by stronger investor sentiment, higher equity valuation, and hot initial public offering markets. Our approach to investor sentiment is not based on erroneous beliefs disjoint from economic fundamentals, but depends on uncertainty on the fundamentals. Our model can explain sector-specific booms uncorrelated with aggregate economic activity and the overall stock market.

Suggested Citation

  • David Dicks & Paolo Fulghieri, 2021. "Uncertainty, Investor Sentiment, and Innovation [Was Prometheus unbound by chance? Risk, diversification, and growth]," The Review of Financial Studies, Society for Financial Studies, vol. 34(3), pages 1236-1279.
    • Handle: RePEc:oup:rfinst:v:34:y:2021:i:3:p:1236-1279.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhaa065
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    Citations

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    Cited by:

    1. Zheng, Yiwei, 2024. "Digital information disclosure, investor sentiment and enterprise default risk," Finance Research Letters, Elsevier, vol. 62(PA).
    2. Seok, Sangik & Cho, Hoon & Ryu, Doojin, 2024. "Dual effects of investor sentiment and uncertainty in financial markets," The Quarterly Review of Economics and Finance, Elsevier, vol. 95(C), pages 300-315.
    3. Ren, Xiaohang & Xia, Xixia & Taghizadeh-Hesary, Farhad, 2023. "Uncertainty of uncertainty and corporate green innovation—Evidence from China," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 634-647.
    4. Hodula, Martin & Janků, Jan & Malovaná, Simona & Ngo, Ngoc Anh, 2024. "Geopolitical risks and their impact on global macro-financial stability: Literature and measurements," BOFIT Discussion Papers 9/2024, Bank of Finland Institute for Emerging Economies (BOFIT).
    5. Douglas de Medeiros Franco, 2022. "Expectations, Economic Uncertainty, and Sentiment," RAC - Revista de Administração Contemporânea (Journal of Contemporary Administration), ANPAD - Associação Nacional de Pós-Graduação e Pesquisa em Administração, vol. 26(5), pages 210029-2100.

    More about this item

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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