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Market value and patent quality

A panel study of Swedish firms

Written by N. Jävervall, W. Wass

Paper category

Master Thesis


Business Administration>General




Master Thesis: The market value method defines a company's market value when it includes intangible assets or "knowledge assets", which has always been considered a difficult task, because the investment in knowledge assets has a certain lag before creating value for the company. Griliches (1981)’s seminal paper solved this problem and has since become the basis of almost all studies that analyze the impact of company’s invention activities on market value (Hall et al., 2007, 2005; Lanjouw and Schankerman, 2004; Rahko , 2014); Sandner and Brock, 2011). We follow his method to derive our dependent variable (ie market value) and when constructing our regression equation. First define a company as a group of assets, and assets are related to the value of the company (Grilices, 1981). This relationship is described in Equation 6 proposed by Sandner and Block (2011), which assumes that assets can be additively added to the market value equation: where Vit represents the market value of company i at time t. Represents the physical assets of the company, K represents the knowledge assets of the company, and σ represents the return to scale of the equation. If σ exceeds 1, the company experiences increasing returns to scale, and if σ equals 1, the company experiences returns to scale unchanged. If the enterprise experiences constant returns to scale, 𝛾 represents the relative shadow value of knowledge assets relative to physical assets, which should be interpreted as the marginal value of additional units invested in Kto A7. Similar to previous studies (eg Hall and Oriani, 2006; Sandner and Block, 2011), we fixed both 𝛾 and σ on time to facilitate the analysis of equations under the loss of marginal accuracy. Finally, qit represents the multiplicative valuation coefficient of firmi assets at time t. The term includes all kinds of interference with the company's valuation. uit represents a separate interference item yt(time) and mI(industry), and captures a wider range of interference factors related to the environment in which the company operates. Therefore, qit captures the specific and general expectations of the financial market for the company. Therefore, by multiplying qit and 𝛾, we can identify the total shadow value of intellectual property investment according to investors’ expectations (Grilices, 1981; Hall et al., 2005; Hall and Oriani, 2006; Rahko, 2014; Sandner and Block, 2011) . 3.4.1 Independent variables Although physical assets can be found in the balance sheet, knowledge assets (K) can contain many different factors, such as capitalized R&D expenditures, patents and other intellectual property rights (Hall et al., 2005; Sandner And Block, 2011)). Shankman, 2004; Sandner and Brock, 2011). Therefore, we use equations 1 to 4 to measure our patent value index and weigh it against the number of patents. In order to calculate R&D measures and the number of patents, it is necessary to make various assumptions. First, the history of variables is easy to observe because it cannot be extracted from accounting data in an understandable way. This is because the company did not capitalize the intellectual assets on its balance sheet (Rahko, 2014). Therefore, we need to capitalize R&D expenditure to estimate the R&D stock. We also need to assume a constant growth rate of R&D expenditure to calculate the R&D stock for the first year of the sample. Based on previous studies (eg Hall et al., 2005; Hall and Oriani, 2006; Lanjouw and Schankerman, 2004; Sandner and Block, 2011), we chose a constant annual growth rate (g) of 8%. In addition to the growth rate of the initial stock, we also need to adjust the value loss of R&D investment and patents, because historical investment has either lost market potential, or invention activities have fully seized its value potential. We do this by adding annual devaluations to historical stocks. As with the growth rate, we follow previous studies (eg Hall et al., 2005; Hall and Oriani, 2006; Lanjouw and Schankerman, 2004; Sandner and Block, 2011) and fixed the abandonment rate (𝛿) at 15%. The calculation of R&D and patent quantity variables and stocks is shown in equations 8, 9 and 10, proposed by Sandner and Block (2011) variables and patent count variables. However, before constructing a regression model, we need to approach the dependent variable, which is the market value of the company. 3.4.2 The dependent variable—the consensus in Tobin’s Q research (Hall et al., 2007, 2005; Hall and Oriani, 2006; Rahko, 2014; Sandner and Block, 2011) is to use the natural logarithm of Tobin’s Q as The market index value is defined as the ratio between the company’s market value (V) and the book value of its assets. A. The book value of assets is simply extracted as the total assets on the company’s balance sheet, and the market value is defined as the company’s total debt and total The sum of equity (Grilices, 1981). There are many ways to define total equity and total debt. Hall and Oriani (2006) believe that due to the time consumption of accurate measurement, accurate measurement can be achieved at the expense of sample size. In contrast, previous studies (Blundell et al., 1999; Hall and Oriani, 2006; Sandner and Block, 2011) believe that it is motivated to ignore accurate measurements in order to maintain a larger sample size. Therefore, we follow their approach and define total equity as the company’s market value. This is calculated by multiplying the total number of outstanding shares by the share prices of common stock and preferred stock. Read Less