NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Ming Dong

Schulich School of Business
York University
4700 Keele Street
Toronto, Ontario, CANADA M3J 1P3
Tel: 416/736-2100 Ext 77945

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Institutional Affiliation: York University

NBER Working Papers and Publications

December 2017Stock Market Overvaluation, Moon Shots, and Corporate Innovation
with David Hirshleifer, Siew Hong Teoh: w24142
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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