Essays in Firm-Level Patenting Activities and Financial Outcomes
In Chapter 1, I construct a new proxy for Tobin's q that incorporates the replacement cost of patent capital. This proxy, PI (physical plus intangible) q, explains up to 64\% more variation in investment than other proxies for q. Furthermore, investment is more sensitive to PI q than to other proxies for q. Although investment is predicted more accurately by, and is more sensitive to, PI q, controlling for PI q leads to relatively higher, not lower, cash flow coefficients. All results are stronger in subsamples with more patent capital. Overall, using PI q strengthens the historically weak investment-q relation.
Chapter 2 includes Noah Stoffman and M. Deniz Yavuz as co-authors, and in this chapter, we find that small innovators (i.e., small, innovative firms) earn higher returns than small non-innovators for up to five years. We find no such innovative premium among large firms. A battery of tests shows that our results are explained by risk, not investor underreaction. Small innovators are especially risky because they focus more on risky product innovation and rely more on organization capital that amplifies their systematic risk. In addition, small innovators contribute significantly to the size premium. Overall, small innovators have a higher cost of equity, which potentially explains why they rely heavily on internal capital.