Strategic Investments, Technological Uncertainty, And Expected Return Externalities

The authors study the effect of competition in technological innovation on asset prices. Using a model of an innovation race in which firms face both technological and market-wide uncertainty when they exercise innovation options, they show that a firm's investment in innovation imposes an expected return "Externality" on its rivals. In equilibrium, a firm's expected return decreases when the firm invests but it increases when the rivals invest. Furthermore, the model predicts that a firm's expected return increases as the firm falls behind in the race. They test this unique cross sectional prediction using an economy-wide panel on patenting activity of firms in the U.S. from 1976 to 2006 and find that the prediction is strongly supported in the data.

Provided by: University of British Columbia Topic: Innovation Date Added: Jun 2011 Format: PDF

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