Corporate innovation, q-theory of investment, behavioral finance
Using Patent Capital to Estimate Tobin's q
I construct a new proxy for Tobin's q that incorporates the replacement cost of patent capital. This proxy, PI (physical plus intangible) q, explains up to 62% more variation in investment than other proxies for q. Furthermore, investment is more sensitive to PI q than to other proxies for q. Although investment is predicted more accurately by, and is more sensitive to, PI q, controlling for PI q leads to relatively higher, not lower, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, 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 innovators earn higher returns than small non-innovators for up to five years. We find no such innovation premium among large firms. A battery of tests shows that this innovation premium among small firms is explained by risk. Our findings, which are based on a simple measure to identify innovative firms, are in contrast with previous papers that attribute higher returns to innovation to investor underreaction. We argue that an innovation premium exists among small firms, but not large firms, because small innovators focus more on risky product innovation and rely more on organization capital, which amplifies their systematic risk. In addition, small innovators contribute significantly to the size premium. Overall, the higher cost of equity among small innovators has implications for their investment, growth, and capital structure decisions.
Works in Progress
Price-Path Convexity, Extrapolation, and Short-Horizon Return Predictability (with Zhi Da and 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 1.34% to 1.53% 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.