UC Irvine

This study examines whether analysts efficiently impound information about innovation into their short-term (quarterly and annual) and long-term forecasts. I use patents to measure technological innovation outputs, and trademarks to measure non-technological product and marketing innovation outputs. Analysts appear to understand that patents increase only long-term earnings growth whereas trademarks increase both short-term earnings and long-term earnings growth. However, their forecasts contain systematic errors. Analysts underreact to the short-term earnings implications of trademarks, and overreact to the long-term earnings implications of both patents and trademarks. In addition, analysts’ short-term forecast errors predicted from trademarks partially explain investor mispricing of trademarks. Collectively, my findings improve our knowledge of whether analysts understand innovation and how analysts’ inefficient use of information about innovation affects the stock market valuation of innovation.