Innovation Search Strategy and Predictable Returns

Because of the intangible and highly uncertain nature innovation, investors may have difficulty processing information associated with a firm’s innovation search strategy. Due to cognitive strategic biases, are likely pay more attention unfamiliar explorative patents rather than incremental exploitative patents. We find that innovative firms focusing on exploitation exploration tend generate superior subsequent short-term operating performance. Analysts do not seem detect this, as currently focused outperform market’s near-term earnings expectations. The stock market also seems unable accurately incorporate about strategies undervalued relative this return differential is standard risk innovation-based pricing factors examined in prior literature. This result suggests nuanced view whether pressure hampers implications for optimal firm financing choices corporate disclosure policy. paper was accepted by David Simchi-Levi, finance.