Intellectual Property Intensity (IPI) and the Value-Growth Effect
AbstractIntellectual Property Intensity (IPI) measures the weight of IP in the firm’s total market value. IPI has a positive (convex) functional relationship with Price to Book (P/B) ratio, and thus may provide additional economic insight to the empirical value-growth effect. Growth firms have higher IPI while value firms are characterized by lower IPI. The large (small) weight of IP in growth (value) firms can explain their higher (lower) profitability. This is due to: (i) the monopolistic power that results from IP and (ii) the higher risk associated with IP. Thus, the lower (higher) returns that characterize growth (value) stocks should be attributed to market inefficiency and mispricing and not to lower (higher) risk. The positive bias in growth stock prices is explained by the inability of investors to fully account for the risk associated with IP. Using a sample of biotechnology companies I compare the forecasting ability of IPI versus P/B. I find that IPI has a superior forecasting ability over P/B.
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Date of creation: 12 Nov 1997
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valuation intellectual property price-to-book market-to-book growth value P/B;
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- K11 - Law and Economics - - Basic Areas of Law - - - Property Law
- M21 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics - - - Business Economics
- M40 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - General
- O34 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
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