Innovation and Financial Markets

6Valorization of Innovation by Financial Markets

In the first chapters of this book, we discussed the very concept of innovation and what it means for entrepreneurs and businesses. On this basis, we will turn the problem upside down and seek to better understand whether the effective management of innovation by companies is recognized and valued by financial markets. Is it favored or, on the contrary, hindered by constraints such as risk aversion, information asymmetry or focus on short-term results?

In this chapter, we will attempt to better understand the relationship between innovation and financial market performance. Initially, we will focus on the reaction of the stock markets. Next, we will analyze the relationship from the perspective of the fixed-income markets.

To do so, we will first go back to the fundamental concepts for analyzing the performance of equity markets. We will have to resort to the use of valuation models for financial assets. These models allow us to better understand the evolution of stock market returns.

The analysis of the performance of innovative companies by these valuation models should thus enable us to answer the central question of this section: are innovative companies well recognized and rewarded by the financial markets?

6.1. How to determine the expected return from innovative companies

In order to be able to determine the most accurate possible quantification of the return expected by investors on various financial assets over a given ...