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

15 Pages Posted: 9 Jan 1998

See all articles by Elli Malki

Elli Malki

Financial-Tip; Rothberg International School of the HU - MA in Nonprofit Management and Leadership; Hebrew University - M.A. in Management of Nonprofit and Community Organizations

Date Written: November 7, 1997

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.

JEL Classification: G10,G12,G14,K11,M21,M40,O34

Suggested Citation

Malki, Elli, Intellectual Property Intensity (Ipi) and the Value-Growth Effect (November 7, 1997). Available at SSRN: https://ssrn.com/abstract=52200 or http://dx.doi.org/10.2139/ssrn.52200

Elli Malki (Contact Author)

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Hebrew University - M.A. in Management of Nonprofit and Community Organizations ( email )

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