Don’t Hide Your Light Under a Bushel: Innovative Originality and Stock Returns

We propose that owing to limited investor attention and skepticism of complexity, firms with greater innovative originality (IO) will be undervalued, especially for firms with higher valuation uncertainty, lower attention, and greater sensitivity of future profitability to IO. We find that IO strongly positively predicts firms’ profitability and abnormal stock returns, especially among those firms suggested by the model. The return predictive power of IO is robust to extensive asset pricing controls, to an alternative IO measure, and across sample periods. Although we do not rule out risk-based explanations, the most plausible interpretation of the evidence is that the market undervalues IO.