No abstract

Prior studies conclude that investors undervalue innovative ability. These studies do not fully capture the prominent role that industry and market trends play in contextualizing innovations. We disaggregate the value generated by innovative skill from the value generated by industry and market trends and find that innovative skill is positively associated with profitability. Further, our results are consistent with a risk explanation as innovative skill is negatively associated with returns, consistent with investors using patent value to identify innovative skill and adjusting the riskiness of the firm accordingly.

No abstract

We study the relationship between balance sheet asset liquidity and subsequent period returns. Our measure of balance sheet asset liquidity is negatively and significantly associated with subsequent period stock returns. More liquid firms earn significantly higher levels of returns over the subsequent period which is consistent with investor perceptions that liquidity is positively associated with risk. Relying on the existing literature related to balance sheet asset liquidity and precautionary savings, we find that firms with highly liquid balance sheets also realize significantly higher levels of cash flow volatility. This represents one possible explanation for why investors perceive more liquid firms as riskier than their less liquid counterparts.