Technology Centrality and Stock Market Valuation of Innovations

We investigate how the stock market values innovations by developing a general equilibrium quality-ladder growth model with technological interdependence across sectors. Our model highlights the importance of sectoral technology centrality, which captures the position of sectors in the technology network. Sectors with greater technology centrality are hubs of the technology network and receive greater knowledge spillovers, making innovations in these sectors more valuable. We empirically examine the relationship between the value of innovations and their centrality by adopting an event study approach to estimate the economic value of patents and using a comprehensive patent citation database to construct the empirical counterpart of technology centrality in our model. Our estimation results suggest that the average patent value in the sector at the 75th percentile of technology centrality is 80% higher than that in the sector at the 25th percentile.