Abstract
This paper establishes a significantly positive relation between innovation productivity and expected stock returns in the cross-section. We illustrate the positive effect of innovation productivity on the expected marginal benefit of technology investment and expected stock returns through a simple q-theory model. Using patent counts and citations per dollar of assets, capital expenditures, and R&D expenditures as the proxies of innovation productivity, we confirm the model implications. The relation is robust to alternative measures of innovation productivity, firm characteristics, and year and industry effects. We also document consistent evidence at the industry and country levels.
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