We propose that public investors react differently to patent issuance depending on its novelty, and these misreactions exert real impacts on the firms' future innovations. First, using textual analyses of patent documents to measure patent novelty, we find that investors underreact to the issuance of path-breaking innovations while overreact to the trend-following ones. (Non-)novel issuance predicts a return drift (reversal) of around 1% in two years. Novel patent issuance predicts lower risk but positive forecast errors, consistent with a non-risk-based novelty mispricing mechanism. A bounded-rationality model, where investors cannot figure out the true novelty of a patent at issuance due to cognitive limits, explains the empirical patterns well. Second, using exogenous distraction shocks, such as earthquakes, we present causal evidence that following disappointing returns, novel firms shift innovation directions from novelty-seeking to copycatting. The findings highlight that investors' misreactions to patent novelty impact firms' future innovation directions by steering them 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.