Industry Effects and Appropriability Measures in the Stock Markets Valuation of R&D and Patents

This paper examines the stock market's valuation of a firm's innovative activity. We estimate the market's relative valuation of firms' tangible and intangible assets, focusing on knowledge capital in the form of accumulated "stocks" of R&D and patents. We tried to improve upon our estimates of the stock market's valuation of knowledge capital embodied in such "stocks" by bringing in measures of the appropriability environment facing a firm from the Yale Survey on Industrial Research and Development. The responses to Survey questions about the effectiveness of patents as a mechanism for protecting the returns from innovation turn out to be of some use: there is evidence of an interaction between industry level measures of the effectiveness of patents and the market's valuation of a firm's past R&D and patenting performance, as well as its current R&D moves. We find no evidence, however, that other appropriability mechanisms differ enough across industries to leave measurable traces in our data. The structure of the Yale Survey makes it possible to estimate the sampling error in the appropriability measures derived from it. This information was used by us in an errors-in-variables c