Technological links and predictable returns

By Charles M. C. Lee, Stephen Teng Sun, Rongfei Wang, Ran Zhang. Journal of Financial Economics, 2019

149 citations recorded by the source corpus.

Employing a classic measure of technological closeness between firms, we show that the returns of technology-linked firms have strong predictive power for focal firm returns. A long-short strategy based on this effect yields monthly alpha of 117 basis points. This effect is distinct from industry momentum and is not easily attributable to risk-based explanations. It is more pronounced for focal firms that: (a) have a more intense and specific technology focus, (b) receive lower investor attention, and (c) are more difficult to arbitrage. Our results are broadly consistent with sluggish price adjustment to more nuanced technological news.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/a459bd6eadfb69a88408ee5d1097755885a0e899

Citations in the corpus

• Shared analyst coverage: Unifying momentum spillover effects (2018, unknown): “Following Lee et al. (2017), we exclude financial stocks from the analysis and assume that the patent data becomes publicly available six months after the end of the year in which the patent is granted.”
• Going digital: implications for firm value and performance (2019, unknown): “For instance, studies have shown that innovation links (Lee et al. 2019), innovative efficiency (Hirshleifer et al. 2013), and the originality of innovation (Hirshleifer et al. 2018) are undervalued by investors and thus predict returns.”