R&D, Patents, and Market Value Revisited

It is known that innovations in the market value of manufacturing firms and their RhD expenditures are related (Pakes (1985) and Mairesse and Siu (1984)). This could be due to shifts in the demand for the output of a particular firm, to shifts in the technological opportunities available to the firm, or to both. In this paper we use innovations in patenting activity as an additional piece of information about technological shifts in order to attempt to identify the relative importance of these two types of shocks. We build a simple two factor model of innovations in sales, investment. R&D investment, patent applications, and the rate of return to holding a share of the firm, and estimate it using a time series-cross section of U.S. manufacturing firms (340 firms from 1973 to 1980). Except in the pharmaceutical industry, we find little evidence of a second factor which can be clearly identified with technological opportunity, although there is evidence of a long run growth factor linking both types of investment, patenting activity, and the market value of the firm. We then go on to demonstrate that this null result could be caused by our use of patent counts as an indicator of the