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385
Innovation, Future Earnings, and Market
Efficiency
FENG GU*
This study examines whether patent citation impact, a leading indicator
of technology firms’ innovation capabilities, is associated with future earnings
and whether this association is appropriately reflected in stock prices
and analysts’ earnings forecasts of patent-rich companies. The results
indicate that change of patent citation impact is positively associated with
future earnings, particularly in industries with relatively short time lags
between technological advances and profit realization (e.g., computers,
electronics, and medical equipment). The strength of this relation also
significantly increases with time for up to five years in the future. Market
participants, including investors and analysts, however, do not fully incorporate
the implication of enhanced innovation capabilities for future
earnings into stock prices and earnings forecasts. This bias is significantly
associated with......

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Approximate Word Count: 13860
Approximate Pages: 56 (250 words per double-spaced page)

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