IFin Seminar, Song MA, Yale University "Obsolete Firms"
Institute of Finance
Date: 18.03.2021 / 15:00 - 16:00
Speaker: Song MA, Yale University
Title: "Obsolete Firms"
Date: March 18, 2021
Time: 15:00 - 16:00
Room: Virtual Room
Research on innovation and growth has mostly focus on the arrival of new and novel innovations and their role in economic growth. But how can we characterize the unavoidable process that a firm's innovation becomes obsolete and the economic implications of technology obsolescence? This paper first proposes a measure of technology obsolescence at the firm-year level. Using detailed annual patent citation data, we build technological obsolescence as the decay of importance of technologies that form a firm's innovation foundations. We first show that technology obsolescence foreshadows a substantially lower growth, reallocation, and the ability to innovation at the frontier in the future. Next, our measure strongly predict stock returns of firms, and a long-short portfolio strategy that buys low-obsolescence and shorts high-obsolescence firms earns abnormal returns of roughly 8% annually. At last, aggregating our measures provides additional sources of variations to explain economic growth and productivity. Importantly, our measure contains additional information relative to existing measure of new innovation, and those indirectly measure creative destruction using competitors' patents.