Innovation Awards, Product Segmentation, and Stock Returns

Abstract

This paper connects technological innovation to product market segmentation using a prestigious award for technology breakthroughs in product inventions: the R&D 100 Award. We argue that award-winning outcomes have asset pricing implications because awarded firms have the growth opportunities to promote their products to high-end markets, which increases revenue procyclical to aggregate consumption and results in higher systematic risks. We find that, compared with their matched industry counterparts, awarded firms are associated with lower product similarity, lower product fluidity, and higher profitability over the future five years. Moreover, these firms outperform their comparable peers by 3% in annual returns and have both significantly higher procyclicality of sales growth and market betas. Moreover, the award-return relation is more pronounced in periods of higher aggregate consumption growth and among firms with higher R&D investments.