Essays on innovation in finance

Abstract

The first chapter focuses on technological innovation. Firms winning the R&D 100 Award, a prestigious award for technology breakthroughs in product inventions, provide significantly higher subsequent stock returns. We hypothesize that such return predictability stems from the awarded firms’ access to high-end markets in segmented markets. We develop a model to formalize this hypothesis and find empirical support for its implications as follows: (1) awarded firms are associated with lower product similarity and higher profitability; (2) awarded firms present significantly higher procyclicality and market betas; and (3) the award-return relation is more pronounced in periods of higher aggregate consumption growth and among firms with higher R&D investments. The second chapter focuses on non-technological innovation. Firms are different but also similar. We construct a novel measure of firm-by-firm pairwise trademark similarity to capture product market overlap. We find empirical support for the similarity-comovement relation: (1) trademark similarity can positively predict future profitability correlation; (2) trademark similarity is associated with higher comovement of excess return, and it is more pronounced among firm pairs with indirect industry linkages, high advertising expenses, and large growth stocks in the long term; (3) a possible explanation is proposed: firms tend to collude with their peers by adopting similar corporate actions so as to realize economies of scale while sharing potential risks, as reflected in higher cost efficiency, higher operational profitability, and lower risk exposure. Overall, firms are rivals but also friends.