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R&D, Innovation, and the Stock Market

Author

Listed:
  • Amit Goyal

    (University of Lausanne; Swiss Finance Institute)

  • Sunil Wahal

    (Arizona State University)

Abstract

We investigate the relation between inventive input (R&D), inventive output (the economic value of patents, EVP), firm-level profitability and asset growth, and stock returns. Current R&D and EVP forecast future profitability. Neither forecast future asset growth. Factor models motivated by q-theory and the dividend discount model fail to price R&D and EVP correctly, leaving large alphas on the table. But model failure is due to design specifics, not economic underpinnings: using cash-based operating profitability to measure expected profitability resurrects both models. The stock market does not appear to misprice inventive input or output.

Suggested Citation

  • Amit Goyal & Sunil Wahal, 2023. "R&D, Innovation, and the Stock Market," Swiss Finance Institute Research Paper Series 23-107, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp23107
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    More about this item

    Keywords

    Research & Development; Patents; Innovation; Intangibles; Profitability; Asset Pricing; Expected Returns; Accruals;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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