Abstract
AbstractPrior studies conclude that investors undervalue innovative ability. These studies do not fully capture the prominent role that industry and market trends play in contextualizing innovations. We disaggregate the value generated by innovative skill from the value generated by industry and market trends and find that innovative skill is positively associated with profitability. Further, our results are consistent with a risk explanation as innovative skill is negatively associated with returns, consistent with investors using patent value to identify innovative skill and adjusting the riskiness of the firm accordingly.
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