Innovation Awards, Product Segmentation, and Stock Returns
This paper connects product segmentation to systematic risk through a prestigious innovation award: R&D 100 Award. We find that firms winning this award provide monthly excess stock returns of 1.10% over the next twelve months. Such an award-return relation remains statistically significant when we use various factor models to adjust for risk or use matched firms that did not win the award as benchmarks. To explain this intriguing pattern, we develop a partial equilibrium model in which award-winning firms are able to sell their products as luxury goods; thus, these firms are subject to higher systematic risk and are expected to provide higher stock returns. Our model also suggest that the award-return relation strengthens when firms have higher R&D investments, which is supported by further empirical analyses.