RQ Innovative Efficiency and Firm Value

Michael Cooper, Ann Marie Knott, and Wenhao Yang

We introduce and test a firm-level innovation-efficiency measure new to the finance literature. The measure, RQ, defined as the firm-specific output elasticity of R&D, was first developed in the management literature. RQ has low correlation with existing innovation input, output and efficiency measures. We test RQ in a number of innovation tests common to the finance literature and find that RQ is robust in all tests of firm value even after controlling for previous innovation measures. The results suggest that RQ may serve as a relevant complementary measure of a company’s innovation.