Absorptive Capacity, Technology Spillovers, and Stock Returns

In the presence of potential technology spillovers, I demonstrate that R&D investment reflects a firm’s absorptive capacity and is crucial in effectively benefitting from spillovers. I find that higher R&D firms, when exposed to large potential spillovers, exhibit stronger future real outcomes (i.e., cite-weighted patents and operating performance) and market value. Importantly, however, this value-relevant information does not appear to be immediately incorporated into stock prices, leading to high future abnormal stock returns for firms with high R&D and spillover exposure. Furthermore, the undervaluation is most pronounced among low investor attention stocks, suggesting that limited attention contributes to the undervaluation.