Business Method Innovations and Firm Value: An Empirical Investigation

31 Pages Posted: 22 Nov 2018 Last revised: 9 Jul 2020

See all articles by Tian Heong Chan

Tian Heong Chan

Emory University - Goizueta Business School

Anandhi Bharadwaj

Emory University - Goizueta Business School

Deepa Varadarajan

Georgia State University - J. Mack Robinson College of Business; Georgia State University - College of Law

Date Written: October 29, 2018

Abstract

Problem Definition. Are business method innovations valuable to manufacturing firms? Do patents further increase their value? Our paper provides answers to these questions with empirical evidence.

Academic/Practical Relevance. Despite increasing academic and practitioner attention on business method innovations, there is a lack of empirical evidence regarding the economic value of business method innovations to manufacturers. Our work points to both business method innovations and business method patents as central sources of firm value.

Methodology. We leverage the exogenous shock of the 1998 State Street ruling, which first recognized business methods as a patentable category of innovation and allowed US manufacturers to patent their business method innovations. We estimate separately the impact of business method innovations and business method patents on firm value.

Results. We find that firms that were granted business method patents after State Street enjoyed a 16% value premium relative to peers with no such patents. We show that this premium consists of two components. This set of firms enjoyed an 11% value premium even before State Street was decided, and saw an additional 12% value increase post–State Street. The former can be viewed as the innovation premium (the value of undertaking business method innovation); the latter may be considered a patent premium (the value of owning intellectual property protection). We corroborate the innovation premium by showing that firms that had filed applications for business method patents (but were yet to receive any business method patent grants) exhibit only the innovation premium, and not the patent premium. We further confirm the existence of a patent premium for business methods by showing that business method patents are more likely to be renewed in comparison to other types of patents.

Managerial Implications. This research provides empirical support for the widely held assumption in the operations and strategy literature that, in the digital age, business method innovations are key drivers of manufacturing firms’ performance.

Keywords: business methods, Tobin's q, patents, manufacturing

Suggested Citation

Chan, Tian Heong and Bharadwaj, Anandhi and Varadarajan, Deepa, Business Method Innovations and Firm Value: An Empirical Investigation (October 29, 2018). Available at SSRN: https://ssrn.com/abstract=3275005 or http://dx.doi.org/10.2139/ssrn.3275005

Tian Heong Chan (Contact Author)

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Anandhi Bharadwaj

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

Deepa Varadarajan

Georgia State University - J. Mack Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States

Georgia State University - College of Law ( email )

P.O. Box 4037
Atlanta, GA 30302-4037
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
115
Abstract Views
602
rank
260,305
PlumX Metrics