Intellectual Property Rights and the Financing of Technological Innovation
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Intellectual Property Rights and the Financing of Technological Innovation

Public Policy and the Efficiency of Capital Markets

Carl Benedikt Frey

Following the transition of industrial nations to knowledge economies, the financing of technological innovation has become a central issue in public policy, corporate finance and business management. This detailed book examines the role of intellectual property rights in facilitating the financing of technological innovation as well as the role of policy makers, investors and managers in this process. The book’s central finding is that public policy plays a key role in promoting the corporate disclosure of intellectual property-related information to enhance the efficiency of capital markets. This not only reduces the costs of capital for technology-driven firms but ultimately spurs innovation and economic growth.
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Chapter 3: Patent information and corporate credit ratings: an empirical study of patent valuation by credit rating agencies

Public Policy and the Efficiency of Capital Markets

Carl Benedikt Frey


While substantial research shows that that stock markets to some extent do differentiate between valuable patents and lemons (see, for example, Hall et al., 2005; Lanjouw and Schankerman, 2004; Neuhäusler et al., 2011), the role of CRAs in doing so has widely been neglected. As past research finds that CRAs provide value-relevant information to both stock and bond markets, their assessments of patent information should be essential to the efficiency of capital markets. This is because, if the value of patents is reflected in their ratings, firms with a high share of valuable patents will receive a higher rating. Hence, financial capital will be allocated to firms with patents of relatively high value, and thus used more productively. Moreover, the issuer will pay a lower interest rate on its debt if investors consider its default risk to be lower. This means that a more favourable rating will attract more investors and enable innovative companies to issue securities at a lower cost. Because information on patent as well as trademark applications is available up to three years before the actual product is brought to market and revenues are generated (see, for example, Ernst, 2001; Jennewein, 2005), IPR management-related factors could be incorporated to forecast the future financial performance of firms.

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