Learning from the Joneses: Technical Uncertainty, Spillover, and Stock Returns

Abstract

This paper provides empirical evidence for the role of technology spillover, an important innovation externality, in asset pricing. Using patent and R&D data, I show that firms with more technology spillover earn 7.7% higher annualized returns than firms with less technology spillover. The return effect is strengthened (attenuated) when there is an exogenous increase (decrease) in the flow of information across firms, exploiting two quasi-natural experiments. I also find that firms with more technology spillover create a larger number of new products. These findings are consistent with models that show technology spillover provides firms with greater information precision to leverage aggregate technology growth more efficiently and therefore develop greater exposure to systematic risks. These findings highlight the important influence of innovation externality on stock returns.