Patent Intensity, Firm Life Cycle, and the Long-Run Return and Risk Dynamics of Technological Innovators

Abstract

We introduce patent intensity (PI), patents granted divided by market capitalization, to classify technological-innovator types starting from 1926. PI-portfolios earn large return spreads for a decade post-formation, and standard factors fail to capture these differences. We further show that traditional value, investment, and profitability premiums are much weaker or reversed among patenters versus non-patenters, explaining their general difficulty pricing innovation.  Incorporating firm dynamics through expected growth or intangibles reconciles observed returns, with high-PI loadings revealing a life-cycle of persistent expected growth, increasing investment, and improving profitability. Life-cycle dynamics in risk are essential to accurately capturing technological innovators’ long-run returns.

Keywords: Technological innovation, patent intensity, stock returns, firm life-cycle, risk dynamics, long-run stock returns, fundamentals-based factor models

JEL Classification: G12, E20