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Aggregate Patent Value as Stock Return Predictor
January 9, 2019 • Posted in Fundamental Valuation
Is value of a firm’s patents a reliable predictor of its stock returns? In their November 2018 paper entitled “Patent-to-Market Premium”, Jiaping Qiu, Kevin Tseng and Chao Zhang investigate firm patent-to-market (PTM) ratio (percentage of market value attributable to patents) as a predictor of stock returns. They specify PTM ratio for each firm as follows:
- Measure stock reaction to each patent grant date.
- Depreciate each patent since grant date via an inventory depreciation method.
- Estimate cumulative market value of all patents held by adding current depreciated values.
- Divide cumulative patent value by firm market value.
They then at the end of June each year reform a hedge portfolio that is long (short) the tenth, or decile, of stocks with the highest (lowest) PTM ratios. Using market and lagged accounting data for a broad sample of U.S. common stocks/firms and intersecting patent data (5,475 distinct firms) during 1965 through 2010, they find that: (more…)
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