Patents, Citations, and Market Value

Abstract

In the past decade and a half, value investing has underperformed growth investing, potentially due to the misalignment of valuation metrics applied to tangible asset light and intangible asset heavy firms. One category of intangible assets is innovation, which can be proxied by research and development expenditure and patents. Patents carry signals of influence in the form of citations, just as academic research does. Using new patent, citation, and financial data on firms from 1976 to 2023, this study uses a market value equation that incorporates R&D, patents, and citations to understand how each variable influences a firm’s market value, denoted by Tobin’s q. We perform non-linear least squares regressions to investigate this relationship. We also uniquely partition the data into different GICS sectors and different time periods to understand what relevant industry effects are at play and how the relationship between innovation and market value has evolved over time. We find that our findings are significant and that citations provide the most influence on market value as previous studies have, however on a percentage basis, the relationship is weaker. We find that innovation has become more important in more recent times. We also find that there are clear industry effects that influence innovation, and that innovation-centric sectors like Health Care and Information Technology have a very strong relationship with innovation, whereas legacy, slow-moving sectors like Utilities do not.