Market Value and Patents In High-Tech Sectors

Abstract

Patents have long been used as a means of encouraging innovation. However, the efficacy of patents as a tool for fostering innovation has increasingly come under question, as critics argue that patents actually harming innovation in the high-tech world. In this thesis, I analyze whether the relationship between firms’ patent and R&D stocks and market value differs for high-tech sectors. Using data on patents and firm financials from 1976-2006, I estimate nonlinear Tobin’s q models based on the ratios of R&D stocks to assets and patents to R&D. The high-tech sector firms are identified using a classification from a 2009 study by Kile and Phillips. on the validity of SIC codes for building high-tech samples. I find that high-tech sector firms overall exhibit a weaker relation between R&D and Tobin’s q, exhibiting approximately half of the impact seen for the set of all firms, while showing a stronger relation between patents and Tobin’s q, at around 3-4 times the impact seen for the set of all firms. An industry-by-industry analysis reveals two industries as extremes. The Drugs/ Pharmaceuticals industry exhibits the same trend as that seen in the overall high-tech sectors group very strongly, with an even weaker R&D relation and a stronger patent relation at under 1/3 and around 9-10 times that of all firms, respectively, while the Computer Programming industry exhibits a negative relationship between patents and market value, resulting in about a 5% decrease in market value with every addition of one patent per million dollars of R&D stock. The rest of the industries in my high-tech sectors group exhibited no statistically significant correlation between patents and market value and had varying Given these findings, there are two main policy conclusions that emerge from this thesis. First, the differences in the relationships between market value and patents and R&D for high-tech sectors means that high-tech patents are taken by the market as more informative than those of other sectors. As such, the granting and enforcement of patents in high-tech sectors calls for more scrutiny, in order to prevent the market from being disrupted or misled by patent signals. Secondly, the great deal of variation between individual industries, even when industries are selected with a common theme — all being considered high-tech, in this case —reflect how differently patents are approached and utilized in different sectors. These differences should be taken into account in a consistent manner for patent awards and enforcement.