Public Policy and the Efficiency of Capital Markets
- New Horizons in Intellectual Property series
Chapter 3: Patent information and corporate credit ratings: an empirical study of patent valuation by credit rating agencies
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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