Companies that invent something completely new to the world earn much higher returns than those that just invent something new for themselves.
April 26, 2026
Original Paper
Technological Innovation and the Cross Section of Returns
SSRN · 6619918
The Takeaway
The stock market provides a specific and measurable premium to firms that push the global technological frontier. Most businesses focus on firm-specific exploration to catch up with their competitors. While this is helpful for the company, it does not provide the same risk-adjusted returns as market-wide novel innovation. Investors can use the semantic distance of a patent from existing technology to predict future performance. This distinction proves that being a true pioneer is more profitable than just being a fast follower.
From the abstract
We introduce Technological Innovation Novelty (TIN), a text-based measure quantifying each patent's semantic distance from the existing technological frontier. Aggregating to the firm level (FTIN), we find that firms producing market-wide novel innovation earn significantly higher risk-adjusted returns. A value-weighted long-short portfolio generates risk-adjusted returns of up to 53 basis points per month, robust across alternative factor models, the exclusion of microcaps and other innovation