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Aggregate Patent Value as Stock Return Predictor

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:

  1. Measure stock reaction to each patent grant date.
  2. Depreciate each patent since grant date via an inventory depreciation method.
  3. Estimate cumulative market value of all patents held by adding current depreciated values.
  4. 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:

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