We propose that investors misreact differently to technological innovations based on novelty, and that these misreactions exert a real impact on firms' future innovations. First, using textual measures of novelty, we find that investors underreact to the issuance of path-breaking innovations but overreact to trend-following ones. Novel patent issuance predicts lower risk and positive forecast errors, consistent with a non-risk-based mispricing mechanism. A model where boundedly-rational investors are unsure about the true novelty of a patent at issuance, explains the empirical patterns well. Second, using exogenous distraction shocks, such as sensational news, we present causal evidence that, after disappointing returns to patent news, novel firms shift from creating and following up on novel innovations to copycatting. The findings highlight that investors' misreactions to patent novelty steer innovation away from higher-valued, groundbreaking research.

What drives state regulation of nonbanks? We examine the factors influencing state-level regulation of nonbank financial institutions. As nonbanks—particularly fintech lenders—capture a growing share of the consumer credit market, states have responded with diverse regulatory approaches. To analyze these responses, we construct one of the first comprehensive databases of enforcement actions against nonbanks across 47 states over 20 years. Leveraging this dataset, we find no evidence that state regulations are primarily motivated by consumer protection or aiding subprime borrowers. Instead, we find evidence suggesting that state regulators may target nonbanks to “protect” state-chartered banks from competition. To explore this further, we investigate the “demand” side, where state-chartered banks lobby, file complaints, or make political donations to reduce competitive pressure, and the “supply” side, where state regulators respond due to incentives like job prospects or financial repression. Regulators may also aim to maintain financial stability, concerned that excessive competition could lead state-chartered banks to take on riskier behaviors.