Working Paper: NBER ID: w29917
Authors: Valentin Haddad; Paul Ho; Erik Loualiche
Abstract: Booming innovation often coincides with intense speculation in financial markets. Using over a million patents, we document two ways the market valuation of innovation and its economic impact become disconnected during bubbles. Specifically, an innovation raises the stock price of its creator by 40% more than is justified by future outcomes. In contrast, competitors’ stock prices move little despite their profits suffering. We develop a theory of investor disagreement about which firms will succeed that reconciles both the facts, unlike existing models of bubbles. Optimal innovation policy during bubbles must account for the disconnect.
Keywords: Innovation; Bubbles; Market Valuation; Speculation
JEL Codes: G00; G40; O30
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Innovation (O35) | Stock price of innovating firm (O31) |
| Innovation (O35) | Competitors' profits (L21) |
| Competitors' profits (L21) | Stock prices of competitors (L11) |
| Investor disagreement (G40) | Stock price of innovating firm (O31) |
| Investor disagreement (G40) | Stock prices of competitors (L11) |