Modelling stock market performance of firms as a function of the quality and quantity of intellectual property owned
Chauhan, Lokendra Pratap Singh
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This thesis attempts to analyze a part of the big and complex process of how intellectual property ownership and technological innovation influence the performance of firms and their revenues. Here I analyze a firm's stock market performance as a function of the quantity and quality of intellectual property (patents) owned by the firm in context of the three US high-technology sectors, Pharmaceuticals, Semiconductors and Wireless. In these sectors, value of a firm is predominantly driven by the technologies which a firm owns. I use citation based indicators and number of claims to measure the quality of patents. This research presents empirical evidence for the hypothesis that in high-tech sectors, companies which generate better quality intellectual property perform better than average in the stock market. I also posit that firms which are producing better quality technologies (good R&D) invest more in R&D regardless of their market performance. Furthermore, though smaller firms get relatively less returns on quality and quantity of innovation, they tend to invest a bigger fraction of their total assets in R&D when they are generating high quality patents. Larger firms enjoy the super-additivity effects in terms of market performance as the same intellectual property gives better returns to them. In addition, returns to R&D are relatively higher in the pharmaceutical industry than semiconductor or wireless industries.