NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Stock Market Overvaluation, Moon Shots, and Corporate Innovation

Ming Dong, David Hirshleifer, Siew Hong Teoh

NBER Working Paper No. 24142
Issued in December 2017, Revised in July 2018
NBER Program(s):Corporate Finance Program, Productivity, Innovation, and Entrepreneurship Program

We test how market overvaluation affects corporate innovation. Estimated stock overvaluation is very strongly associated with R&D, innovative output, and measures of innovative novelty, originality, and scope. R&D is much more sensitive than capital investment to overvaluation. Misvaluation affects R&D more via a non-equity channel than via equity issuance. We document how the sensitivity of R&D and innovative outcomes to misvaluation depends on growth, overvaluation, and turnover. The frequency of exceptionally high innovative inputs/outputs increases with overvaluation. This evidence suggests that market overvaluation may generate social value by increasing innovative output and by encouraging firms to engage in ‘moon shots.’

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Document Object Identifier (DOI): 10.3386/w24142

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