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Bubbles and the Value of Innovation
(with Valentin Haddad and Paul Ho)

Journal of Financial Economics, July 2022, 145:1, Editor's Choice

First version: December 2017
This version:  February 2022

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Abstract:

Booming innovation often coincides with intense speculation in financial markets. 
Using over a million patents, we document two ways the market valuation 
of innovation and its economic impact become disconnected during bubbles. 
Specifically, an innovation raises the stock price of its creator by 40% more
than is justified by future outcomes. In contrast, competitors’ stock prices 
move little despite their profits suffering. We develop a theory of investor 
disagreement about which firms will succeed that reconciles both the facts,
unlike existing models of bubbles. Optimal innovation policy during bubbles
must account for the disconnect.








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Bibtex file

This paper has been presented under the titles
  - Optimal Firm Creation with Speculation 
  - Efficient Bubbles?


Blog post from the UCLA Anderson Review
Blog post from the Carlson School Discovery Magazine
Economic Brief from the Federal Reserve Bank of Richmond


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