Market Competition and Innovation Premium Before and After the Financial Crisis: Evidence from Taiwan

Abstract

This study explores the influence of innovation and market competition on stock returns in Taiwan before and after the 2008 financial crisis. This study offers marginal contributions to the important topic of innovation investment which is a vital driver of competitiveness and growth. The study employs Fama Macbeth regression and a sorting portfolio to examine a sample of 121,913 firm-month observations from 1991 to March 2021. A Two-Stage Least Squares estimation is also employed to address unobserved endogeneity issues. The empirical findings suggest that innovation premiums persist in Taiwan. However, the findings also report that higher market concentration reduces stock returns in Taiwan. The results support the information asymmetry theory and the resource-based view theory. This study can support policymakers and managers in developing innovative activities sustainably in emerging markets, while also helping individual investors to optimize their investment portfolios.