How Does the Primary Market Value Innovations of Newly Public Firms?

Posted: 3 Aug 2017

See all articles by Qin Lian

Qin Lian

Portland State University

Qiming Wang

Willamette University - Atkinson Graduate School of Management

Date Written: July 31, 2017

Abstract

We investigate whether and how the primary market values the innovations of newly public firms at their IPOs by examining the link between the size (the number of patents) and the quality (citation count) of their patent portfolios and IPO valuations. We find that the number of patents, the citation count, and innovation efficiency (patents or citations scaled by research and development expenditure) are positively associated with offer price multiples but the effect of the number of patents subsumes that of the citation count/innovation efficiency. There is no significant effect of patent portfolios on price revisions or first-day returns, suggesting that underwriters/firms price information on innovation quantity and quality is priced in the offer prices and the market makes no further price adjustment on innovation information. The positive effect of innovation quantity on IPO valuation subsumes that of innovation quality. We also demonstrate that the link between patent portfolios and IPO valuations is stronger in the later sample period. Using Tobin’s Q as another IPO valuation measure produces similar results. We obtain no evidence that an IPO’s patent portfolio is overvalued in the primary market, as the number of patents and the citation count are not significantly associated with long-run stock and operating performances.

Keywords: innovation output; IPO valuations; patents; citation count; innovation efficiency; Tobin’s Q

JEL Classification: G30; G32

Suggested Citation

Lian, Qin and Wang, Qiming, How Does the Primary Market Value Innovations of Newly Public Firms? (July 31, 2017). Journal of Accounting, Auditing and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3011565

Qin Lian (Contact Author)

Portland State University ( email )

United States
5037253728 (Phone)

Qiming Wang

Willamette University - Atkinson Graduate School of Management ( email )

900 State Street
Salem, OR 97301
United States

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