Patented Knowledge Capital and Implied Equity Risk Premium

85 Pages Posted: 27 Jan 2014 Last revised: 24 Aug 2019

See all articles by Shantaram P. Hegde

Shantaram P. Hegde

University of Connecticut - School of Business

Dev R. Mishra

University of Saskatchewan - Edwards School of Business

Date Written: August 21, 2019

Abstract

Patented knowledge capital improves transparency of research and development expenditures, converts intangible intellectual property into collateralizable and salable assets, enhances sustained competitive advantage, and lowers future financing risk and growth uncertainties. We conjecture and find that knowledge capital, proxied by stocks of patents, their forward citations and estimated market value, is associated with lower future cost of equity as well as firm risk. The reduction in equity premium impact is stronger for firms with higher marginal productivity of innovation capital, larger profitability and cash holdings, lower growth opportunities, and fewer financial constraints. These findings appear robust to potential endogeneity concerns about firms’ innovative activities, controls for technology spillovers from industry rivals, and product market competition.

Keywords: Implied Cost of Equity, Fama-French three factor model, Patents, Citations, Innovation

JEL Classification: F3, G1, G3

Suggested Citation

Hegde, Shantaram P. and Mishra, Dev R., Patented Knowledge Capital and Implied Equity Risk Premium (August 21, 2019). Available at SSRN: https://ssrn.com/abstract=2385062 or http://dx.doi.org/10.2139/ssrn.2385062

Shantaram P. Hegde

University of Connecticut - School of Business ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States
860-486-5135 (Phone)

Dev R. Mishra (Contact Author)

University of Saskatchewan - Edwards School of Business ( email )

Edwards School of Business
Saskatoon, Saskatchewan S7N 5A7
Canada
306-966-8457 (Phone)
306-966-2515 (Fax)

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