Working Paper: NBER ID: w23432
Authors: David Hirshleifer; Pohsuan Hsu; Dongmei Li
Abstract: We propose that innovative originality (InnOrig) is a valuable organizational resource, and that owing to limited investor attention and skepticism of complexity, firms with greater InnOrig are undervalued. We find that firms’ InnOrig 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 InnOrig is stronger for firms with higher valuation uncertainty, lower investor attention, and greater sensitivity of future profitability to InnOrig. This evidence suggests that innovative originality acts as a ‘competitive moat,’ and that the market undervalues InnOrig.
Keywords: Innovative Originality; Profitability; Stock Returns
JEL Codes: G12; G14; G3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| valuation uncertainty (D46) | innorig effect (F55) |
| investor attention (G24) | mispricing (D49) |
| innorig (Y60) | profitability (L21) |
| innorig (Y60) | stock returns (G12) |