Innovation-Product Connection: R&D 100 Awards, Product Segmentation and Stock Returns

Abstract

This paper connects product market segmentation to asset pricing through a prestigious award for technology breakthroughs in product inventions: the R&D 100 Award. We argue that award-winning events have asset pricing implications because award-winning firms can promote their products to the high-end market, which increases profitability in a procyclical way and results in higher systematic risk. We find that, compared with their matched industry peers, award-winning firms are associated with higher future gross profit margins and net sales. Moreover, award-winning firms outperform their matched industry peers by 3% in annual return. To explain this intriguing pattern, we develop an investment-based model to connect growth opportunities, R&D investments, product awards, and stock returns. The model also suggests that the award-return relation increases with R&D investments and aggregate consumption, which receive empirical support.