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In this paper the authors investigate the link between competition in technological innovation and asset prices. They develop a model of an innovation race in which firms are subject to technological as well as market-wide uncertainty and optimally exercise their options to innovate. The model predicts that the race leader has lower systematic risk than its lagging rival, that the follower-leader spread in systematic risk widens as the distance between the firms' technological efficiencies increases, and that the systematic risk of the portfolio of race participants increases with the number of competitors.
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