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Intellectual Property Intensity (IPI) and the Value-Growth Effect

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  • Elli Malki

    (Financial-Tip)

Abstract

Intellectual 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.

Suggested Citation

  • Elli Malki, 1997. "Intellectual Property Intensity (IPI) and the Value-Growth Effect," Finance 9711002, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9711002
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    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Lakonishok, Josef & Shleifer, Andrei & Vishny, Robert W, 1994. " Contrarian Investment, Extrapolation, and Risk," Journal of Finance, American Finance Association, vol. 49(5), pages 1541-1578, December.
    3. Chan, Louis K C & Hamao, Yasushi & Lakonishok, Josef, 1991. " Fundamentals and Stock Returns in Japan," Journal of Finance, American Finance Association, vol. 46(5), pages 1739-1764, December.
    4. Elli Malki, 1997. "Royalty rates, sub licensing considerations and joint ventures," Finance 9709004, EconWPA.
    5. Davis, James L, 1994. " The Cross-Section of Realized Stock Returns: The Pre-COMPUSTAT Evidence," Journal of Finance, American Finance Association, vol. 49(5), pages 1579-1593, December.
    6. Elli Malki, 1997. "Intellectual property and the valuation of biotechnology," Finance 9709002, EconWPA.
    7. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    8. Fama, Eugene F & French, Kenneth R, 1996. " Multifactor Explanations of Asset Pricing Anomalies," Journal of Finance, American Finance Association, vol. 51(1), pages 55-84, March.
    9. repec:hrv:faseco:30721347 is not listed on IDEAS
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    More about this item

    Keywords

    valuation intellectual property price-to-book market-to-book growth value P/B;

    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; Personnel Economics - - Business Economics - - - Business Economics
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital

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