Corporate innovation, q-theory of investment, behavioral finance
Job Market Paper
Using Patent Capital to Estimate Tobin's q
I develop a new proxy for Tobin's q that incorporates the replacement cost of patent capital. This proxy, which I call PI (physical plus intangible) q, explains up to 63% more variation in firm-level investment than other proxies for q. Using PI q also leads to higher coefficients on q. Although PI q is a better proxy for q, controlling for PI q leads higher, not lower, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, these results show that using PI q strengthens the historically weak investment-q relation.
Small Innovators: No Risk, No Return (with Noah Stoffman and M. Deniz Yavuz)
We find that small, innovative firms (i.e., small innovators) earn persistently higher returns than small non-innovators because they have higher risk. Conversely, we find no such innovative premium among large firms. We find that small innovators are especially risky because they focus more on risky product innovation and rely more on organization capital than large innovators. In addition, small innovators contribute significantly to the size premium, thereby supporting theories that explain the size premium through option-like assets. Overall, small innovators have a higher cost of equity, which potentially explains why they rely heavily on internal capital.
Works in Progress
Price-Path Convexity, Extrapolation, and Short-Horizon Return Predictability (with Huseyin Gulen)
We document a strong relation between intra-month stock price paths and subsequent one-month returns. Specifically, stocks whose prices increase at an increasing rate (i.e., stocks with convex price paths) subsequently underperform stocks whose prices decrease at an increasing rate. This effect ranges from 1.40% to 1.59% per month and is not explained by either the sign of the return over the sorting month or commonly-used predictors of short-term returns. We find similar results in non-US G7 countries and at the aggregate level in the US. We argue that the negative relation between price-path convexity and subsequent one-month returns is consistent with investor over-extrapolation of recent price changes.