Deciphering the seemingly counter intuitive impact of firm innovation on stock returns in the electronics sector

Abstract

This paper investigates the impact of firms’ innovative activities on stock returns for firms in the electronics sector. The regression analysis provided counter intuitive result that exploitation and exploration are not significant in explaining stock returns. However, further analysis on firm size revealed that innovation have statistically significant explanatory power in the stock returns of relatively large firms, and the effect was negative and positive for exploitation and exploration, respectively. This is consistent with general expectations. The result implies that equity investors may believe that innovation is important for relatively larger firms only.