Are Ivory Towers Truly Ivory? The Impact of Knowledge on Stock Volatility

While firms typically innovate through R&D, it is not the only way to make progress, since firms can also gain competitive advantage by learning from others -- through knowledge spillovers. This research hypothesizes that firms headquartered near a knowledge center, as defined by Carnegie Classifications' 196 leading research universities in the United States, innovate more and experience higher stock volatility. We argue that knowledge spillovers foster firms' innovative ability in an increasingly knowledge-based economy. Further, we explore the channels through which knowledge affects firm risk, and find growth to be the main mechanism at play. Controlling for industry and year effects across a large sample from 1980 to 2009, we find strong evidence in support of our hypothesis, even after taking firm R&D into account. Our results are robust to various model specifications and estimation methods, including but not limited to controls for proximity to the nearest metropolitan city, industry clustering within the same MSA, patent activity, and regional demographics. We use both propensity score matching and 2SLS to address potential endogeneity. We are the first to identify knowledge-based innovation as a determinant of idiosyncratic risk. Consistent with Nelson and Phelps (1966), our evidence demonstrates the economic implications of human capital for firms, investors, and beyond