The value of patent knowledge: internal and external valuation

This dissertation consists of three essays analyzing how patenting firms and external investors value the knowledge describe in the patent document. A patent is a document that bestows a temporary exclusivity right (20 years from the filing date) over the described invention. In the patent document, one can find information about assignees, inventors, application date, priority date, a list of prior art (backward citations), the invention technological classification, and the claims describing the invention. Therefore, a patent disclose a rich set of information, which might reveal a firm’s valuable technological information and be used by competitors. Therefore, I study the patenting firm valuation of the information conveyed by the patent and how external investors value the patented knowledge. In the first chapter, I study publicly firms’ motivations to delay patent disclosure. The enactment of the American Inventors Protection Act (AIPA), in November 29, 2000, required U.S. patent applicants to have their patent application published 18 months after filing date but allowed them to opt for keeping it secret if they relinquished foreign patent protection. Using a sample of granted patents applied for by publicly traded companies, between 2000 and 2009, I investigate what drives large companies’ decision to keep a patent secret up to grant. Particularly, in this chapter I investigate the effect of technological crowdedness, strategic use of in-house knowledge stock, and invention radicalness on the decision of opting out of pre-grant publication. Results show a negative association between technological crowdedness and pre-grant secrecy, while radicalness and the use of in-house knowledge stock are positively associated with the likelihood of a patent application being secret until grant. In the second chapter, we use an event study methodology to investigate whether the stock market values innovation milestones. First, we investigate abnormal returns generated due to a patent grant event. Results point to investors, on average, not valuing the information disclosed in the patent document. We then test several explanations about why investors do not value patent grants on average: patent value is highly skewed, the number of patents granted is ever increasing and only some patents protect technology that results in successful products. By analyzing stock market reaction to the approval of a drug by the U.S. Food and Drug Administration (FDA), we show that the stock market is able to value innovation that results in a product. This suggests that innovation that will clearly generate sales revenue in the short run are highly valued by investors. We point out some implications of these results. Finally, in the third chapter, I look at the effect of firm’s technological diversification on firm value (Tobin’s q). Firm’s technological knowledge base contributes to identifying technological opportunities and answering demand changes. Therefore, a firm with broader technology base might be better able to cope with technology uncertainties achieving higher future returns. Technological classes of the firm’s patents were used to calculate an entropy index of technological diversification. Using a sample of 1,304 R&D intensive US firms over 16 years (1992-2007) I find that on average technological diversification has a positive and significant impact on firm value. Further, diving into industry level differences, results indicate that technological diversification matters to investors’ assessment of firm’s future cash flows in the electronic industry. On the other hand, in the chemical industry, technological diversification does not have a significant effect on Tobin’s q.Programa Oficial de Doctorado en Empresa y Finanzas / Business and FinancePresidente: Carlos J. Serrano; Secretario: Catalina Martínez García; Vocal: Eduardo Melero Martí