Stock Returns and Geographic Innovation Index

Using a combination of CRSP and Compustat files and a survey-based dataset from publicly-traded pharmaceutical firms in the United States, along with a matching dataset comprising 42,849 observations of pharmaceutical patent citations, we combine both quantitative and qualitative research methods to investigate the relationship between geographic proximity to innovation resources and stock returns. We develop a geographic innovation index to capture the key locational factors that might have a positive impact on a firm’s knowledge creation. We then examine the stock investment performance in terms of risk-adjusted returns for companies that have greater versus weaker proximity to geographic innovation resources. We find that investments in companies with greater proximity to geographic innovation resources tend to achieve better risk-adjusted returns in the stock market.