A Text-Based Analysis of Corporate Innovation

We develop a new measure of innovation using the text of analyst reports of S&P 500 firms. Our text-based measure gives a useful description of innovation by firms with and without patenting and R&D (research and development). For nonpatenting firms, the measure identifies innovative firms t...

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Bibliographic Details
Published in:Management science 2021-07, Vol.67 (7), p.4004-4031
Main Authors: Bellstam, Gustaf, Bhagat, Sanjai, Cookson, J. Anthony
Format: Article
Language:English
Subjects:
Companies
Geography
innovation
Innovations
latent Dirichlet allocation
Logistics
machine learning
natural language processing
Organizational performance
Patenting
R&D
Research & development
Stock exchanges
textual analysis
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Summary:We develop a new measure of innovation using the text of analyst reports of S&P 500 firms. Our text-based measure gives a useful description of innovation by firms with and without patenting and R&D (research and development). For nonpatenting firms, the measure identifies innovative firms that adopt novel technologies and innovative business practices (e.g., Walmart’s cross-geography logistics). For patenting firms, the text-based measure strongly correlates with valuable patents, which likely capture true innovation. The text-based measure robustly forecasts greater firm performance and growth opportunities for up to four years, and these value implications hold just as strongly for innovative nonpatenting firms. This paper was accepted by Gustavo Manso, finance.
ISSN:0025-1909
1526-5501
DOI:10.1287/mnsc.2020.3682