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Medical Innovation, Human Capital Productivity, and the Cross Section of Stock Returns

Medical innovation enhances labor health, promotes human capital productivity, and influences asset prices. Using a manually collected dataset on drug approvals to identify medical innovation, I first confirm its direct impact on human capital -- a higher medical innovation shock predicts a higher growth of hours worked and total factor productivity, and firms with higher MedBeta, which is the comovement of stock returns with medical shocks, have significantly higher measures of human capital intensity. Portfolio sorting analyses then suggest that the annual return spread of MedBeta is about 4%. Additional tests confirm medical shock as a positively-priced systemic risk.