Working Paper: NBER ID: w29504
Authors: Song Ma
Abstract: This paper proposes a new measure of technological obsolescence using detailed patent data. Using this measure, we present two sets of results. First, firms' technological obsolescence foreshadows substantially lower growth, productivity, and reallocation of capital. This finding applies mainly for obsolescence of core innovation and embodied innovation, and it is stronger in competitive product markets. Second, in stock markets, high-obsolescence firms under-perform low-obsolescence firms by 7 percent annually. Using analyst forecast data, we show this is due to a systematic overestimation of future profits of obsolescent firms. The measure contains incremental information about firm innovation relative to measures focusing on new innovation.
Keywords: technological obsolescence; firm performance; financial market returns; patent data
JEL Codes: G1; G3; G4; O3; O4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| analysts' systematic overestimation of future profits (G17) | stock market underperformance (G17) |
| technological obsolescence (O33) | profit growth (O49) |
| technological obsolescence (O33) | output growth (O40) |
| technological obsolescence (O33) | capital growth (O41) |
| technological obsolescence (O33) | employment growth (O49) |
| technological obsolescence (O33) | revenue-based total factor productivity (TFP) (O49) |
| technological obsolescence (O33) | stock market performance (G10) |
| core technology obsolescence (L63) | negative outcomes (I12) |
| peripheral technology obsolescence (L63) | negative outcomes (I12) |