Innovation efficiency and stock returns: Quantitative portfolio strategy based on innovation efficiency

The purpose of this thesis is to shed light on the interaction between the innovation efficiency of firmsand stock price fluctuations. The thesis aims to answer the question of how the innovation efficiency offirms can be measured and whether innovation-efficient firms can outperform their peers. The empiricalanalysis is performed on a European sample over the period between 2002 and 2022. Portfolios that arebased on several innovation efficiency scores are constructed, and their risk and return characteristicsare assessed. Furthermore, multi-factor asset pricing models are used to examine the abnormal returnson the portfolios. The empirical results show positive and statistically significant abnormal returns onportfolios that are based on innovation efficiency scores. According to the empirical results, individualinvestors should pay attention to the innovative capacities of firms when selecting stocks. The empiricalresults offer an interesting contribution to the existing literature by comparing different innovation efficiencyscores in a single data setup.