Future profitability and stock returns of innovative firms in Australia

This paper examines the impact of innovation on future profitability and stock returns. We first replicate and confirm the findings of Hirshleifer et al. (2018) in the U.S. setting. Consistent with Hirshleifer et al. (2018) we find that innovation is associated with: (1) higher and more persistent profitability suggesting that more innovative firms are able to maintain a competitive advantage and (2) positive future stock returns suggesting mispricing of innovation in current share prices. When we extend these analyses to the Australian setting we continue to find that innovative firms experienced sustained profitability but unlike Hirshleifer et al. (2018) we find no evidence of mispricing. We argue that the general paucity of innovation in Australia and the two-tier registration system which allows investors to differentiate between the quality of patents, enable Australian investors to better price innovation.