Technological Innovation Spillovers and Stock Returns

This paper empirically examines the effects of industrial and geographic innovations on firm-level profitability and stock returns due to spillovers. Using the data of U.S. patents and patent inventors, we propose empirical proxies for industrial and geographic spillovers and find a positive relation between innovation spillovers and profitability. In addition, firms with higher industrial or geographic spillovers are found to provide higher stock returns. We also construct an industrial spillover factor and a geographic spillover factor based on sorted portfolios, and find that both carry significant loadings in the stochastic discount factor. Our empirical evidence suggests an important role of innovation spillovers in asset pricing.