Working Paper: NBER ID: w24142
Authors: Ming Dong; David Hirshleifer; Siew Hong Teoh
Abstract: We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is very strongly associated with measures of innovative inventiveness (novelty, originality, and scope), as well as R&D and innovative output (patent and citation counts). Misvaluation affects R&D more via a non-equity channel than via equity issuance. The sensitivity of innovative inventiveness to misvaluation is increasing with share turnover and overvaluation. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and by encouraging firms to engage in highly inventive innovation.
Keywords: Corporate Innovation; Market Overvaluation; R&D Expenditures; Innovative Output; Misvaluation
JEL Codes: D22; D23; D25; G14; G3; G31; G32; G4; G41; O32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market overvaluation (G10) | increased corporate innovation (O36) |
| market overvaluation (G10) | increased R&D expenditures (O32) |
| market overvaluation (G10) | greater innovative inventiveness (O35) |
| market overvaluation (G10) | riskier, more ambitious projects (G31) |
| misvaluation (D46) | innovative inputs and outputs (O36) |
| misvaluation (D46) | sensitivity of R&D (O32) |
| overvaluation (F31) | innovation outputs (O36) |