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Is Propensity to Innovate a Priced Risk in a Global Financial Institution Multifactor Pricing Model?

Abstract: We use reporting data from 2001 annual reports to construct a single measure of propensity to innovate for each member of a multi-country sample of global financial institutions. The measure proves to be robust when reconstructed from later 2002-2005 annual reports. It is also value relevant within a multifactor framework, more successful in forecasting marginal long run returns to stocks of our sample institutions over the period from 2002-2006 than the book/market factor in the Fama-French international two factor international alternative. This result suggests Fama-French book-to-market-ratio-based returns may be a market-wide proxy for multiple industry-specific priced risks.