E2026012                                                                             2026-05-27

Zhao Rong    Shiqi Weng    Junjun Ma    Lei Lu

Abstract

This study examines whether firms’ innovation output, measured by patent counts, predicts stock returns in China. We find that patents predict future returns only for non-state-owned enterprises (non-SOEs), where retail investors underreact to innovation signals. This predictability weakens with greater institutional ownership and foreign investor participation, suggesting that sophisticated investors improve the pricing of innovation. In contrast, patents do not predict returns for state-owned enterprises (SOEs), where weak managerial incentives limit patent-to-profit transfer efficiency. Only high-quality invention patents matter for SOEs, while executive stock options improve transfer efficiency. Overall, patents predict returns only when they are converted into firm value yet not fully incorporated into prices. These findings highlight how ownership structure, investor composition, and managerial incentives shape innovation pricing in emerging markets.

Keywords: Innovation; Stock returns; Patent-to-profit transfer efficiency; SOEs

JEL Classifications: G12; G14; O31

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