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Innovation and Firm Value: An Investigation of the Changing Role of Patents and Firm Publications Sharon Belenzona

, Andrea Patacconib

a Fuqua School of Business, Duke University b University of Aberdeen Business School Abstract How to measure R&D capabilities is a key concern for policymakers and practitioners alike. This paper examines the changing role of patents and firm publications as a signal of scientific and technical competence. We argue that recent patent reforms might have reduced the informational value of USPTO patents relative to EPO patents. Moreover, the global trend toward stronger patent enforcement may have raised the cost of freely disclosing research results in the scientific domain. Using data from more than 33,000 mergers and acquisitions deals between 1985 and 2007, we provide support for these conjectures. Controlling for patent citations or restricting attention to specialized or within-country deals reduces as expected the relative importance of EPO patents. Our results do not appear to be driven by changes in the importance of patenting in multiple jurisdictions. JEL Classification: O31, O32, O16 Keywords: firm value, patents, scientific publications Authors’ Contact Details: Sharon Belenzon: Duke University: The Fuqua School of Business, 1 Towerview Drive, Durham, NC 27708, USA Tel. (919) 660-7845 Email: sharon.belenzon@duke.edu Andrea Patacconi: University of Aberdeen Business School, Edward Wright Building, Dunbar Street, Aberdeen, AB24 3QY , UK Tel. + 44 (0)1224 273423 Email: a.patacconi@abdn.ac.uk Corresponding Author: Andrea Patacconi

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1. Introduction

In fast-paced industries where intellectual property is key, patents are increasingly becoming a

currency that allows technology transactions to take place and that ultimately determines firm value

(Jaffe and Lerner, 2004). Patents are best positioned to fulfill the role of medium of exchange in

technology transactions for two main reasons. First, by giving patent holders the right to exclude

others from using an invention, patents protect inventors from the risk of expropriation. This benefits

especially small firms which often have no other way to protect their ideas than to rely on the legal

system. Second, patents disclose information – a detailed description of the invention – which is

often important to mitigate problems of asymmetric information. Uncertainty may in fact lead to

higher perceived risk and thus lower valuation for the technology under exam (Arrow, 1962;

Akerlof, 1970; Ritter and Welch, 2002).

Recent patent and administrative reforms have most likely affected both the legal and the

informational value of patents in technology markets.1

While the strengthening of patent protection is arguably a global phenomenon (Lerner,

2001), the deterioration of examination standards and the consequent decline in patent quality appear

to be concentrated mainly in the United States. Reasons include the low patenting costs at the

Starting from the early 1980’s, patent

protection has been considerably strengthened in most OECD countries. Important steps in this

direction have been the creation in 1982 of a “pro-patent” Court of Appeals in the U.S., the

subsequent upward harmonization of intellectual property protection standards via international

agreements, and the extension of patentability to new subject matter such as biotechnology and

software (in the U.S., also business methods). Unfortunately, there is evidence that, as patents gained

importance, examination standards began to decline. This decline has been attributed at least in part

to the huge increase in patent applications in the last thirty years and is believed by some to represent

a real danger to the innovation process. Indeed, if standards decline so much that applicants can get

patents for obvious or existing ideas, then patents might be used to harass, seek compensation from,

or even shut down legitimate businesses (Jaffe and Lerner, 2004). Firms may even refuse to enter

some technology sectors for fear of litigation, with possible negative long-run implications for the

pace of technological progress (Lerner, 1995).

1 For a discussion of the evolution of the patent system in the U.S., see Kortum and Lerner (1999), Jaffe (2000) and Gallini (2002), among others. The books by Jaffe and Lerner (2004) (from a U.S. perspective) and Guellec and van Pottelsberghe de la Potterie (2007) (from a European perspective) provide detailed analyses of the causes and consequences of recent patent reforms.

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USPTO, which encourage marginal applications, and motivational and psychological considerations

that give USPTO examiners strong incentives to accept rather than reject applications (Lemley,

2001; Jaffe and Lerner, 2004; Guellec and van Pottelsberghe de la Potterie, 2007).

Motivated by these concerns, the present paper explores how the correlation between firm

value and multiple indicators of innovative activity (EPO and USPTO patents and firm publications)

has changed over time.2 Our analysis focuses on more than 33,000 mergers and acquisitions deals

that took place between 1985 and 2007. We hypothesize that a decline in the average quality of

USPTO patents (relative to EPO patents) might have reduced the value of USPTO patents as a signal

of a firm's ability to perform R&D. Previous research has shown that patents provide a useful

measure of a firm's inventive efforts and stock market value (e.g., Griliches, 1990; Bloom and Van

Reenen, 2002; Belenzon, 2009), especially when weighted by citations (Trajtenberg, 1990). Our

main result is that over time EPO patents have become the dominant indicator of innovative activity,

while USPTO patents have no effect on firm value in the late sample period. This is true also when

patents are weighted by citations, although citations-weighting generally increases the relative

importance of USPTO patents.3

The robustness of these results is probed in several ways. An important finding is that EPO

patents appear to be most closely associated with firm value when the acquiring and target firms

belong to different industries or countries. We interpret this finding as suggesting that the acquiring

firms in our sample may differ in their ability to evaluate potential targets and that the uncertainty

associated with the target’s technology is large especially in cross-industry and cross-country deals.

If this is true, in fact, then EPO patents may be perceived as less risky (and thus more valuable) than

USPTO patents, especially in this type of transactions (an ‘EPO certification’ effect). Substantial

variation across industries is also found. Our results hold most strongly in drugs and chemicals,

where patents are generally very important, but much less so in electronics and communications,

Moreover, consistent with the view that the strengthening of patent

protection has increased the cost of disclosing research in the scientific domain, we find that,

controlling for patents, the correlation between firm value and publications declines over time and is

insignificant toward the end of the sample period.

2 Firm publications are articles published in "hard science" journals where one of the co-authors is a company employee. These articles may provide a useful signal of the technical and scientific competence of the sponsoring firm (see, e.g., Henderson and Cockburn, 1994; Cockburn and Henderson, 1998; Belenzon and Patacconi, 2009). 3 This is not surprising since citations proxy for patent quality and patent quality may at least to some extent be observed by the acquiring firm (Hall et al., 2005). In that case, we would expect the coefficient on the less reliable indicator to rise, relative to the coefficient on the more reliable indicator.

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where patenting is not strongly related with firm value in any of the sample periods.4

The remainder of the paper is organized as follows. The next section discusses recent trends

in patent policy and spells out our main predictions. Section 3 describes the data. The econometric

specification is discussed in Section 4 where we also highlight the main econometric problems we

face. Section 5 reports the empirical results. Section 6 concludes.

Lastly, our

findings do not appear to be driven by changes in the importance of patenting in multiple

jurisdictions.

2. Background and predictions

2.1. The changing institutional environment 5

There is widespread consensus that from the early 1980's, various patent and administrative reforms

have led not only to a strengthening the legal value of patents, but also unintentionally to a decline in

patent examination standards. In the U.S., a key step in the direction toward stronger patent

protection was the creation in 1982 of a specialized Court of Appeals of the Federal Circuit.

Although the stated objective of Congress was to provide uniformity in patent litigation cases, the

court soon demonstrated a “pro-patent” disposition (Merges, 1992; Mazzoleni and Nelson, 1998).

The court has been found, for instance, to uphold in appeal a larger proportion of decisions favorable

to the patent holder, to reverse a larger proportion of decisions unfavorable to patent holder, and to

substantially increase the rate of preliminary injunctions, compared to the previous system (Dunner

1988; Gallini, 2002; Lanjouw and Lerner, 2001). Moreover, the definition of patentable subject

matter was broadened to accommodate the needs of emerging new fields (most notably

biotechnology and software), and patent duration was lengthened. Several countries followed the

U.S. example in a process of upward harmonization of intellectual property protection standards

(Lerner, 2001; Guellec and van Pottelsberghe de la Potterie, 2007).

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The strengthening of the legal value of patents has given firms powerful incentives to seek

patent protection (Kortum and Lerner, 1999; Hall and Ziedonis). Patent applications nearly tripled

4 Information technology is another interesting industry. There we find that EPO patents have no effect on value, while USPTO patents remain the dominant technology indicator throughout the whole estimation sample. This supports the common wisdom that the U.S. enjoys a strong technological leadership in information technology. 5 This subsection is based mainly on Gallini (2002), Jaffe and Lerner (2004) and Guellec and van Pottelsberghe de la Potterie (2007). 6 The 1994 trade-related intellectual property rights (TRIPS) agreement is a good case in point.

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between 1980 and 2000 in the U.S., with Europe and Japan following suit. This huge increase in

patent applications most likely contributed to the decline of examination standards that has been the

focus of much debate recently. Jaffe and Lerner (2004) provide many examples of patents that

should never have been awarded because they were based on obvious or not-novel ideas.7

Importantly for our purposes, this decline in examination standards – and therefore patent quality –

appears to be concentrated mainly in the U.S. Three possible reasons have been put forward. First,

the USPTO is severely understaffed relative to other major patent offices. Guellec and van

Pottelsberghe de la Potterie (2007) estimate that "both the incoming workload of examiners (number

of claims filed per examiner) and their output (number of claims granted per examiner) is three to

four times higher at the USPTO than at the EPO" (p. 201). Thus USPTO examiners spend

considerably less time than EPO examiners on each claim. Guellec and van Pottelsberghe de la

Potterie conclude that decisions at the EPO tend to be based on a more careful assessment of the

prior art than at the USPTO, which might explain the much higher rejection rates in Europe.8

Another possible explanation for the decline of U.S. examination standards relates to the

pressures that USPTO examiners face to accept rather than reject applications (Lemley, 2001; Jaffe

and Lerner, 2004). Many observers have pointed out that by transforming the USPTO in a user-fee

funded entity, the 1990 Omnibus Act might have promoted a “customer-friendly” mentality. Jaffe

and Lerner (2004) provide several anecdotes illustrating the dysfunctional effect of such a mentality.

More concretely, Jaffe and Lerner also emphasize that USPTO examiners are rewarded according to

how fast they process applications. However, since applicants can modify and appeal initially

rejected patents, rejections tend to be very time-consuming. As a result, examiners have strong

incentives to accept rather than reject applications, no matter how weak these applications might be.

Last but not least, patenting costs are much lower in the U.S. than in Europe or Japan. van

Pottelsberghe de la Potterie and François (2009) estimate that a EPO patent that is renewed for 20

7 Examples include the patent on a "Sealed Crustless Sandwich", option pricing formulas, and perhaps more controversially one-click business methods. 8 See Guellec and van Pottelsberghe de la Potterie (2007, pp. 202-203) and the references therein. Jaffe and Lerner (2004) also show that successful USPTO applications have risen in the period between 1987 and 1998 twice as much as `important' inventions that were granted in all three of the world's major patent jurisdictions (the USPTO, EPO, and JPO). They argue that this finding is "hard to explain in any manner other than declining standards in the U.S. PTO, producing an ever-growing proportion of U.S. patents the patent-holders themselves did not think merited patenting elsewhere" (p. 143). Finally, Gallini (2002) argues that if the time series of Kortum and Lerner (1999) is extended to include the second half of the 1990's as well, Kortum and Lerner's conclusion that the U.S. did not become an increasingly attractive destination for foreign inventors should be tempered, thus "lending some support for the ‘friendly court’ hypothesis" (p. 138).

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(10) years in 13 member states costs almost 9 (4.6) times as much as a USPTO patent. An obvious

effect of such low patenting costs is to encourage low-quality applications. This is likely to worsen

the patent quality distribution and increase its variance. Perverse feedback effects may also result,

with low patenting costs exacerbating existing workload problems.9

2.2. The informational role of patents

Patent reforms such as those discussed above matter because technology markets are generally

thought to under-provide incentives for innovation. For instance, at least since Arrow (1962) it has

been clear that innovators may lack sufficient incentives to disclose their inventions and thus

innovate for fear that buyers may steal their ideas. Patents offer a way to get around this problem by

providing legal protection against expropriation (Arora et al., 2001). Moreover, because they are

publicly available, patents can convey information to prospective investors. The value of this

information often goes beyond the intrinsic value of the patented invention as it can help evaluate a

firm’s long-term prospects (e.g., its ability to successfully innovate). These last considerations are

likely to be relevant especially for small firms with few other assets other than their intellectual

capital and, indeed, survey evidence indicates that especially small firms patent for reputational

reasons (Cohen et al., 2000) and to attract venture capital (Hall and Ziedonis, 2001).10

Together, these considerations suggest that if the legal value of patents has increased by

approximately the same amount in the U.S. and Europe, but examination standards have declined

especially in the U.S., then over time EPO patents should become increasingly more reliable

indicators of innovative activity, compared to USPTO patents. Moreover, the trend should be

pronounced especially for small firms.

H1. Over time, firm value should become more strongly correlated with EPO patents than USPTO

patents, especially for small firms.

9 How fee structures should be changed to improve the quantity-quality tradeoff is an important topic in current debates, especially after the USPTO raised its fees in 2004. See Guellec and van Pottelsberghe de la Potterie (2007, pp. 212-213) for more on this. 10 For instance, Cohen et al. find that smaller firms are significantly (at .01 confidence level) more likely to report the motive "to enhance the reputation of the firm or its employees" as a reason to patent. They argue that this could be rationalized "by the need of smaller firms in some high technology industries to hold patents in order to acquire financing or alliance partners" (p. 24).

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Despite their usefulness, a serious problem with patents is that they vary tremendously in their

quality and economic significance. Prospective investors, in particular, may be expected to collect

much more information about the target company’s technology than simply patent counts. The most

natural – albeit imperfect – way to proxy for investors' private information is to use patent

citations.11

Since the landmark work of Trajtenberg (1990), citation-weighted patent indexes have

been shown to be strongly correlated with the social value of innovations (Trajtenberg, 1990), peer

evaluation of their technical importance (Albert et al., 1991), renewal decisions (Thomas, 1999;

Harhoff et al., 1999), and firm value (Deng et al., 1999; Bloom and Van Reenen, 2002; Hirschey and

Richardson, 2004; Hall et al., 2005; Belenzon, 2009). Particularly interesting is Hall et al.'s (2005)

finding that investors are able to accurately forecast the expected value of patented inventions, as it

is later confirmed by future citations. This finding suggests that once we control for the intrinsic

importance of the invention (as measured by patent citations), the predictive power of patents in firm

value regressions should increase. This is likely to be true especially for USPTO patents since their

quality should be very heterogeneous. By contrast, if the EPO label already provides quality

certification, then citations might only marginally affect the informational value of European patents.

These contrasting patterns should become more pronounced over time if USPTO patents have

become more heterogeneous in terms of quality.

H2. When patents are weighted by citations, firm value should become more strongly correlated with

USPTO patents and less with EPO patents, especially in the late sample period.

Finally, although all firms might attempt to gather as much information as possible, substantial

heterogeneity in their ability to evaluate potential targets might still remain. It has long been

recognized that learning about new technologies is a costly activity that requires substantial

investment in “absorptive capacity” (Cohen and Levinthal, 1989; Gambardella, 1995). This is true

also when evaluating potential alliance partners and acquisition targets (Liebeskind et al., 1996;

Arora and Gambardella, 1990). A natural way to control for the amount of private information

acquiring firms possess is to distinguish between deals that involve firms operating in the same

industry, and deals that do not. The idea is of course that firms operating in the same industry might

11 An alternative way would be to estimate the private value of patents using annual renewal fees as in Schankerman and Pakes (1986).

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possess specialized knowledge that helps them to evaluate technology in that industry. Similarly,

investors involved in within-country acquisitions may possess superior information about the target

firm’s technology thanks to interactions with local supplies, banks, and business partners. Based on

these ideas, we conjecture that firms involved in between-industry or -country deals (and thus likely

to have poor information about a target firm’s technology) might perceive USPTO patents as risky,

at least compared to EPO patents. This might result in a discount for USPTO patents, effectively

paying a premium for the certification provided by the EPO.

H3. EPO patents should be more strongly related with firm value in between-industry and between-

country acquisitions.

2.2. The informational role of firm publications Another way in which firms can demonstrate their scientific and technical competence is by

publishing in academic journals (Henderson and Cockburn, 1994; Cockburn and Henderson, 1998;

Belenzon and Patacconi, 2009). This could be because scientific publications capture at a high level

of abstraction the scientific base of patented inventions. Many scientific ideas are in fact first

published in academic journals and then patented (Murray, 2002; Murray and Stern, 2006).

Alternatively, scientific publications may proxy for investments in basic research carried out to

evaluate, monitor, and exploit research conducted in the public sector (Cohen and Levinthal, 1989;

Cockburn and Henderson, 1998).

Publications can benefit the sponsoring firm in several ways. One is to improve corporate

image, or “prestige” (Hicks, 1995). Prestige, in turn, may help certify the quality of a firm's products

to sophisticated buyers (Nelson, 1990; Azoulay, 2002), make it easier to raise external funds or win

government contracts (Audretsch and Stephan, 1996; Higgins et al., 2008; Lichtenberg, 1986, 1988),

and attract talented employees (Nelson, 1990; Audretsch and Stephan, 1996; Stern, 2004).

Publications may also help company employees to remain better connected to the wider scientific

community, thus fostering organizational learning (Rosenberg, 1990). These benefits, however, must

be weighed against the potential cost. The most important drawback of any policy of disclosure is

arguably that competitors may use the disclosed information to gain competitive advantage

(Bhattacharya and Ritter, 1983). It is precisely for this reason that many companies systematically

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screen their publications (Koenig, 1983). We conjecture that the recent trend toward stronger patent

protection might have increased the cost of freely disclosing information since competitors may use

this information to secure patents themselves.

H4. Over time and controlling for patents, the correlation between firm value and publications

should decline.

On the other hand, strong patent protection may mitigate the risk of expropriation and thus increase

the propensity to publish if the same piece of knowledge is both published and patented

(Gambardella, 1995). Belenzon and Patacconi (2009) provide evidence consistent with the view that

patent-publication pairs are more prevalent in BioMed and Chemicals. To control for this possibility,

we will distinguish between different technology fields in the empirical part.

3. Data

Our paper combines data from several sources: (i) M&A data from Thomson SDC Platinum, (ii)

information on patents from the United States Patent and Trademark Office (USPTO), (iii)

information on patents from the European Patent Office (EPO), and (iv) scientific publications from

Thomson Web of Knowledge.

Data on M&A deals is from Thomson SDC Platinum. We drop deals that do not report

information on value, net total assets, and acquired stakes. This leaves us with 33,920 deals. We

match these firms to our patent and publication datasets. Prior to the acquisition year, 5,471 firms

have at least one patent in the USPTO, 4,108 firms have at least one patent in the EPO, and 1,557

firms have at least one scientific publication. Table 1 summarizes main descriptive statistics for our

sample. Firm value is computed as the ratio between transaction value and acquired stakes. The

average firm is valued at $182 million, has $91 million in total assets, and generates $137 million in

annual sales and $23 million in profits. For each innovating firm we construct the patent and

publication stocks prior to the acquisition year. Stocks are computed using the perpetual inventory

method with a depreciation rate of 15 percent. To control for quality of patents and publications, we

construct citations-weighted stocks. These are constructed by weighting each patent and publication

by the number of citations received (excluding self-citations) divided by the average number of

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citations received by all other patents or publications in the same year. The average innovating firm

has a stock of 12 USPTO patents (a median of 2), 9 EPO patents, and 3.6 publications.

Insert Table 1 here

Table 2 examines the distribution of innovating firms across years. Among innovating firms,

89.2% have at least one USPTO patent, 67.0% have at least one EPO patent, and about 20% publish

at least one scientific article. Over time, the share of firms that patent in the USPTO remains quite

stable while the share of firms that patent in the EPO increases substantially from a low of 50% in

1985 to around 75% in 2007. The share of publishing firms, on the other hand, declines from a high

of nearly 30% in 1985 to around to 11% in 2007. 85% of the firms that have at least one patent in the

EPO also patent in the USPTO. This percentage is higher in the earlier periods of our sample. In the

period 1985-1990, 87% of the firms that patent in the EPO also patent in the USPTO, whereas in the

post-2000 period only 77% of the firms that patent in the EPO also patent in the USPTO. A similar

pattern holds for publishing firms. In 1985-1990, 20% of the patenting firms also publish at least one

scientific article, compared to 15% in the post-2000 period.

The share of non-American acquisitions changes substantially over time. In the whole sample

just over 40% of the acquisitions involve an American target, yet this figures falls from around 50%

in 1990 to less than 20% in 2007. Another important feature is the extent to which firms patent in

more than one jurisdiction. 10% of all firms and 53% of the innovating firms patent in both USPTO

and EPO. These figures remain stable over time (54% of the innovating firms patent in both

jurisdictions in 1990 as compared to 55% in 2007). Intangible assets do not appear to become more

important for firm value over time. The average value of Tobin's Q (value over total assets) pre-1997

is 9.2 (a median of 1.9), and 9.0 (a median of 2.1) in the post-1997 period.

Insert Tables 2 and 3 here

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4. Econometric analysis and potential biases

We estimate the following specification for the value of target firms, for the whole sample and for

different time periods.12

iitititititit PubPatEUPatUSAssetsValue εητββββ +++++++++= −−− )1ln()1ln()1ln(lnln 1312110

where Valueit is the value of the target firm i at the acquisition completion year t and is computed as

transaction value over acquired equity, Assetsit is total net assets, and PatUSit–1, PatEUit–1 and Pubit–1

are respectively the target firm’s USPTO patent stock, EPO patent stock, and publication stock prior

to the deal completion year. tτ and iη denote complete sets of dummies for the transaction

completion years and two digit target industry SIC codes. iε is an iid error term. We proxy patent

quality using citations. Each patent is weighted by the ratio of the number of citations it receives

(excluding self-citations) and the average number of citations received by all patents that were at the

same year. We also control for the quality of publications using the number of citations they receive.

Our main interest is the way the coefficients β1, β2 and β3 change over time. The key problem

we face is that the firm sample changes from one year to another. This leaves our results sensitive to

unobserved heterogeneity bias. A concern might be, for instance, that firms that choose to patent in

the EPO in the late sample period may be, on average, of higher (unobserved) quality than firms that

patent in the EPO in the beginning of the sample period. This means that later in the sample period

the correlation between EPO patents and unobserved firm quality is positive, causing an upward bias

in β2. For instance, over time the payoff from patenting in the EPO might have increased (say

because of “globalization”), but only for firms with specific skills (a talented management, better

distribution channels, etc.). While some of these high-quality firms may have chosen not to patent in

the EPO in the earlier periods of our sample, most of them may do that in later periods.

Alternatively, globalization might have made "important" patents even more valuable over time

(important patents being those granted in more than one major jurisdiction). This effect might be

captured by EPO patents since most firms in our sample patent in the USPTO. Clearly both stories

may explain the increasing correlation between firm value and EPO patents over time. However, it is

12 Lerner (1995) estimates a similar specification.

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not clear how they could also explain the fading impact of USPTO patents on firm value that we

observe.

Another potential source of sample selection is industry composition. For instance, in the

later period of the sample we are likely to observe more biotechnology and information technology

acquisitions than in earlier periods. If the impact of patents on firm valuation varies across

industries, then our key estimates could be biased. To deal with this concern, we report our main

estimation results separately for the main innovative industries in our sample.

Finally, a basic premise of our analysis is that patent citations are a useful proxy for patent

quality. However, because the citations a patent receives accumulate over time, patent quality is

likely to be measured with error toward the end of the estimation sample. If EPO certification

provides a measure of quality because few "bad" patents are granted in the EPO, then β2 is likely to

be higher (and β1 lower) in the last years of the sample period even when patents are weighted by

citations, since USPTO patents might still be extremely noisy indicators of innovative activity.

Given our data, there is no reliable way to control for firm unobserved heterogeneity, and we

are not likely to find a better measure of patent quality than patent citations. Our strategy, thus, is to

examine different sub-samples and show that the EPO effect is particularly strong for firms and

transactions with specific sets of characteristics. For example, we distinguish between within- and

between-industry transactions. EPO certification is more likely to matter in between-industry

transactions, since potential investors there arguably face substantial uncertainty about the target

firm's technology. Finding evidence consistent with certification in between-industry transactions,

but not within, is hard to explain by EPO selection or the citations-truncation argument alone.

5. Findings

5.1. “Horse-race” estimation

Table 4 reports the estimation results for the complete sample period. We start with the unweighted

patent measures. Columns 1-3 include separately each of the innovation indicators. All are strongly

related to firm value. The coefficients on USPTO patents, EPO patents, and firm publications are

0.121 (a standard error of 0.008), 0.158 (a standard error of 0.010), and 0.186 (a standard error of

0.029), respectively. Columns 4 to 6 provide horse-race estimations where each of the innovation

indicators is matched with another. Column 7 reports the results when all three indicators are

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included in a single regression. While all three coefficients are highly significant, EPO patents

appear to have the strongest effect on value with a coefficient of 0.106, as compared to coefficients

of 0.049 and 0.069 on USPTO and publication stocks. This pattern is even more evident when we

focus on innovating firms (i.e., those with at least one USPTO or EPO patent, or at least one

scientific publication). As shown in column 8, in this regression the value-EPO relation remains

strong (a coefficient of 0.086 and a standard error 0.014), while the value-USPTO relation is no

longer significant.

Columns 9-14 control for the quality of patents and citations using the number of citations

they receive. Column 9 includes USPTO and EPO patents. Both coefficients are positive and highly

significant (0.081 with a standard error of 0.011, and 0.093 with a standard error of 0.014, for

USPTO and EPO patents respectively). Column 10 includes USPTO patents and publications.

Interestingly, the coefficient on USPTO patents is effectively identical to the unweighted coefficient

(0.123 versus 0.121). On the other hand, the coefficient on the weighted publications stock is

substantially lower than the unweighted one. This finding is consistent with the idea that

publications might capture some of the patent quality heterogeneity that is observable only to firms.

Column 12 includes all three indicators. Compared to the unweighted regressions, the coefficient on

USPTO patents is much closer in magnitude to the coefficient on EPO patents. The same pattern of

results continues to hold when including only innovating firms, or “high-tech” transactions. Finding

that USPTO patents matter more for value when controlling for citations suggests that citations

indeed capture information that firms possess and use when bidding for targets. Next, we explore

how the value-innovation relation varies over time.

Insert Table 4 here

5.2. Variation over time

Table 5 reports the estimation results when the sample is split into four time periods. Several striking

findings emerge. Looking at the unweighted regressions (all innovation indicators included), it is

clear that the importance of EPO patents increases over time, with β2 rising from a low of 0.066 in

1985-1990 to a high of 0.159 in 2001-2007. By contrast, the coefficient on USPTO patents shows no

clear trend: β1 first rises from 0.046 in 1985-1990 to 0.077 in 1996-2000, and then sharply declines

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to a low of 0.013 in 2001-2007.13

Columns 9-16 control for patent and publication quality. The same pattern of results

continues to hold, with the coefficient on EPO patents nearly tripling in magnitude over the sample

period. The most interesting comparison is that between weighted and unweighted regressions.

Controlling for citations raises the coefficient on USPTO patents (β1 is larger in every sample

period), while the coefficient on EPO patents generally drops. This is consistent with Hypothesis 2:

citations raise the coefficient on the low-quality indicator without affecting too much the coefficient

on the more precise indicator. However, we also find that the gap between β1 and β2 does not seem

to narrow especially toward the end of the sample period.

Also, the decline in the importance of USPTO patents seems to be

driven by the inclusion of EPO patents. In the first sample period, controlling for EPO patents

reduces the coefficient on USPTO patents from 0.076 to 0.046 (both coefficients are highly

significant); in the last sample period, the coefficient drops from 0.119 to essentially zero. These

findings are broadly consistent with Hypothesis 1: over time, EPO patents become the dominant

innovation indicator, while USPTO patents are not informative about firm value in the late sample

period.

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Finally, Table 5 provides evidence on the changing role of scientific publications as a signal

of technical and scientific competence. We argued that the global trend toward stronger patent

protection might have increased the cost of freely disclosing research results. Consistent with this

view, the value-publications relation is strong only at the beginning of the sample period.

Controlling for USPTO and EPO patents, the coefficient on publications stock is 0.115 and highly

significant (a standard error of 0.038). Estimating the same specification for the period 2001-2007

yields a completely different pattern: the coefficient is effectively zero (a coefficient of -0.001 and a

standard error of 0.041). Interestingly, the decline in the value-publications relation does not seem to

be driven by the strengthening of the value-EPO relation. The coefficient on firm publications

becomes insignificant in 1996-2000 also when not controlling for EPO patents (column 5).

This is not consistent with Hypothesis 2,

but it could be explained by the limited power of citations in the late-period sample (the “truncation”

argument).

13 A possible explanation for such a pattern is the dotcom bubble, which reached its apex in 2000. It is interesting to note that the coefficient on EPO patents appears not to have been affected by the bursting of the bubble in 2000. 14 Despite this, note that the coefficient on USPTO patents, while not significant in column 8, is marginally significant in column 16.

15

Insert Table 5 here

5.3. Target firm size

Survey evidence indicates that especially small firms benefit from patents matter for signaling and

reputational reasons (Cohen et al., 2000; Hall and Ziedonis, 2001). Table 6 studies whether our

results are driven by differences between large and small target firms (size is measured by sales).

Columns 1-8 examine firms in the fourth quartile of target firm size (the largest ones). On average,

these firms have $409 million in annual sales and a value of $367.4 million. Neither USPTO nor

EPO patents seem to matter particularly for these firms. This contrasts with the pattern that emerges

by looking at the firms in the lowest sales quartile (columns 9-16). These firms have average annual

sales of $6.3 million and average firm value of $44.8 million. At the beginning of the sample period,

the coefficients on USPTO and EPO patents are both highly significant. In column 14 (weighted

regression, 1985-1997 period), for instance, the coefficients are respectively 0.210 and 0.175, with

standard errors of 0.045 and 0.056. By contrast, in 2001-2007 (column 16), the coefficient on

USPTO patents drops to 0.111 (with standard error of 0.089) and is no longer significant (the

coefficient on EPO patents instead remains highly significant). Thus, consistent with our prior,

Hypothesis 1 appears to be confirmed especially for small firms, while patents matter much less for

large firms. Finally (and perhaps surprisingly), we find no large difference between the coefficients

on scientific publications for large and small firms. A possible explanation could be that although

signaling is more important for small firms, many publications by start-ups are motivated by the

desire of the scientist/entrepreneur to foster his or her academic career. As a result, these

publications might be only loosely related to the activities of the publishing firm.15

Insert Table 6 here

5.4. Within- and between-industry acquisitions

This subsection explores the possibility that firms might be heterogeneous in their ability to evaluate

acquisition targets. We distinguish between within- and between-industry acquisitions using the two-

15 Alternatively, publications might be the sign of poor organizational practices (an “excessive” focus on basic research), which may affect especially young, small firms. See also Belenzon and Patacconi (2009).

16

digit SIC codes of the acquiring and target firms. We expect acquiring firms to possess more detailed

information about the target firm's technology in within-industry acquisitions due to their superior

knowledge of the industry. Thus, controlling for citations, the EPO label should not add significant

information on firm value in the case of specialized (within-industry) acquisitions (a small EPO

certification effect). By contrast, firms that expand through diversification may not possess a deep

understanding of the target's technological environment. As a result, USPTO patents might be

perceived as risky, and thus discounted, relative to EPO patents (a strong EPO certification effect).

Table 6 reports the estimation results. Columns 1-8 examine how the value-patent relation

varies over time for within-industry acquisitions. When citations are not controlled for, the

coefficient on USPTO patents is effectively zero in the later sample period (a coefficient of 0.023

and a standard error of 0.041), while EPO patents appear to be strongly related to firm value (a

coefficient of 0.110 and a standard error of 0.048). This pattern of results changes when citations are

accounted for. Column 8 exhibits a significant positive correlation between firm value and USPTO

patents (a coefficient of 0.077 and a standard error of 0.037). By contrast, the coefficient on EPO

patents, albeit similar in magnitude (0.072), is insignificant (the standard error is 0.045). Thus the

EPO certification effect appears to be small in within-industry acquisitions, at least when citations

are controlled for.

Columns 9-16 focus on between-industry acquisitions. A different pattern emerges. In the

later sample period, USPTO patents have no effect on firm value in both weighted and unweighted

regressions (coefficients of -0.003 and 0.017 for the unweighted and weighed regressions,

respectively). The coefficients on EPO patents instead rise over time and are especially large at the

end of the sample period. These findings suggest that quality certification through the EPO might

indeed be valuable when acquiring firms are likely to have limited information about the target

firm’s technology. If a firm cannot assess the quality of USPTO patents in between-industry

acquisitions, then it would most likely discount their value. As a result, the more reliable EPO

patents would become the dominant indicator of the target firm's technology (Hypothesis 3).

Insert Table 7 here

17

5.5. Within- and between-country acquisitions

Firms planning an acquisition might also have better information about the value of the potential

target if they operate in the same country as the target. Motivated by this observation, Table 8

examines the sensitivity of our results to cross-country transactions and to the nationality of the

target company. In all regressions we control for patent and publication quality using citations.

Columns 1-8 distinguish between transactions where the acquiring and target firms belong to

the same country and transactions where the firms belong to different countries. The main finding is

that the importance of USPTO patents remains high later in the sample period for within-country

deals (a coefficient of 0.077 and a standard error of 0.028), but not for cross-country deals (a

coefficient of -0.039 with a standard error of 0.055). On the other hand, EPO patents are highly

important both for within-country and between-country deals. This pattern is again consistent with a

stronger discount for USPTO patents in situations where the acquiring firm is likely to have limited

information about the target (Hypothesis 3).

Columns 9-16 investigate the robustness of the results to the nationality of target firms. As

shown in columns 13-16, our key findings are driven by non-American firms. Thus, the

strengthening of the EPO certification effect over time is especially evident for cross-country

transactions involving non-American firms. This result is interesting because it suggests that the

value-USPTO relation is not likely to be driven by American companies that over time became more

global and thus put more emphasis on EU intellectual property protection.

Insert Table 8 here

5.6. Industry variation

Patent protection varies considerably across industries. This variation can be driven by different

legal patentability requirement or by differences in the nature of technology. To examine how the

value-patents relation varies across industries, we separately estimate our main specification for the

following industries: drugs and chemicals, telecommunications, computers and electronics, and

information technologies. Drugs and chemicals are examples of industries where patent protection is

extremely important. The fundamental nature of innovation and its long life cycle are some of the

reasons. Telecommunications and computers and electronics are industries where innovation tends to

18

require the integration of many different pieces of knowledge and is often incremental, with follow-

up developments often rapidly displacing existing products. Information technology is a particularly

interesting industry because patentability requirements vary across the United States and Europe.

While in the U.S. advances in IT can be easily patented, the patentability requirements for such

inventions are much stricter in Europe, regardless of the quality of the invention.

The estimation results are summarized in Table 9. Our previous findings are confirmed in

drugs and chemicals. In these industries, EPO patents become more dominant over time, while the

effect of USPTO patents disappears. In telecommunications, patents do not seem to be an important

determinant of firm value. In computers and electronics and information technologies, USPTO

patents remain the dominant technology indicator also in the late sample period. A possible

explanation is that the United States is the technological leader in these industries, with the USPTO

arguably granting the vast majority of the technical advances in these industries, typically by

American firms.

Finally, while the correlation between scientific publications and firm value declines sharply

over time in all industry classes, substantial heterogeneity remains. The coefficients on publications

are often negative in telecommunications and computer and electronics, reflecting perhaps growing

skepticism toward basic research. However, they always remain positive (albeit sometimes

insignificant) in drugs and chemicals, where “absorptive capacity” is deemed to be particularly

important (Cohen and Levinthal, 1989; Gambardella, 1995; Cockburn and Henderson, 1998) and

published knowledge can be effectively protected by patents (Gambardella, 1995).

Insert Table 9 here

5.7. Patenting in multiple jurisdictions

This subsection investigates the possibility that our results may be driven by changes in the

importance of patenting in multiple jurisdictions. We conjecture that if adopting a global approach to

business becomes more important over time, then firms that patent both in the United States and

Europe might become increasingly attractive as targets over time, compared to firms that only patent

in one jurisdiction – the globalization hypothesis. This might help explain our findings because most

19

innovating firms in our sample have patents in the USPTO and the main source of variation in dual

jurisdiction comes from EPO patenting.16

Table 8 examines whether patenting in both the USPTO and the EPO has become more

important over time. We create a globalization dummy which receives the value of one for firms that

patent in both EPO and USPTO, and zero for all other firms. Throughout we control for patent and

publication quality. The results are not consistent with the globalization hypothesis. The coefficient

on the globalization dummy is significant in the first half of the sample period but not in the second.

The same pattern of results holds when we look at American and non-American firms separately

(columns 5-12), and at firms that have at least one patent in the EPO (columns 13-16). A possible

explanation for this finding is that if operating across countries becomes easier over time, then more

low-quality firms might apply for patents in multiple jurisdictions. Thus the average quality of

“global” firms may decline over time. At any rate, it is clear that even when controlling for patenting

in multiple jurisdictions, our main results are robust.

Insert Table 10 here

6. Conclusions

Motivated by recent debates on the evolution of the patent system in the United States and Europe,

and in particular by a book by Jaffe and Lerner (2004), the present paper examines the effect of

multiple indicators of inventive activity on firm value in a dataset of nearly 34,000 mergers and

acquisitions deals between 1985 and 2007. Consistent with the hypothesis that examination

standards and hence patent quality might have declined especially in the U.S., we find that, even

controlling for citations, EPO patents become over time the dominant technology indicator, while

USPTO patents have little effect on firm value in the last few years of the sample period. The results

are particularly strong in between-industry and between-country deals, suggesting that the EPO may

play a certification role in these transactions. Lastly, consistent with the idea that stronger patent

protection might have increased the cost of freely disclosing research, we find that controlling for

patents, the effect of scientific publications on firm value declines over time and is insignificant in

the late sample period.

16 Indeed, Table 2 shows that the share of innovating firms that patent in the EPO rises from about 50% at the beginning of the sample to around 75% towards the end of the sample.

20

An important limitation of the present analysis is that since the firm sample changes over

time, our results might be sensitive to unobserved heterogeneity bias. In particular, we cannot rule

out the possibility that EPO patents have become more important over time because more and more

high-quality firms have chosen to patent in the EPO towards the end of the sample period. While it is

not clear how this explanation could rationalize the industry and country variation we document, an

important direction for future research would certainly be to gather additional data to mitigate such

concerns.

Acknowledgements:

We thank Hadar Gafni for excellent research assistance. We also thank Ashish Arora, Tim Barmby

and Julian Williams for helpful comments. All remaining errors are our own.

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Appendix

Matching patent data We match the name of each patent applicant listed on the patent document to the full name of a firm listed in Amadeus and Icarus (about 22 million names). Our source of USPTO patents is the 2007 version of the NBER patents and citations data archive. For EPO patents, we use the 2007 publication of the PATSTAT database, which is the standard source for European patent data. This database contains all bibliographic data (including citations) on all European patent applications and granted patents, from the beginning of the EPO system in 1979 to the end of 2007. Since we are interested only in matching patent applicants to firms, we exclude applicant names that fall into the following categories: government agencies, universities, and individuals. We identify government agencies and universities by searching for a set of identifying strings in their name. We identify individuals as patents where the assignee and the inventor name strings are identical. The matching procedure follows two main steps. (i) Standardizing names of patent applicants. This involves replacing commonly used strings which symbolize the same thing, for example "Ltd." and "Limited" in the UK. We remove spaces between characters and transform all letters to capital letters. As an example, the name "British Nuclear Fuels Public Limited Company" becomes "BRITISHNUCLEARFUELSPLC". (ii) Name matching: match the standard names of the patent applicants with Amadeus firms. If there is no match, then try to match to the old firm name available in Amadeus. We need to confront a number of issues. First, in any given year, the Amadeus database excludes the names of firms that have not filed financial reports for four consecutive years (e.g. M&A, default). We deal with this issue in several ways. First, we use information from historical versions of the Amadeus database (1995-2006) on names and name changes for European firms. Second, even though Amadeus and Icarus contain a unique firm identifier (BVD ID number), there are cases in which firms with identical names have different BVD numbers. In these cases, we use other variables for identification, for example: address (ZIP code), date of incorporation (whether consistent with the patent application date), and more. Finally, we manually match most of the remaining corporate patents to the list of Amadeus and Icarus firms.

Matching academic publications The largest database on academic publications is the ISI Web of Knowledge (WoK) by Thomson. This includes millions of records on publications in academic journals. The data is divided into three main categories based on the publication type: hard sciences, social sciences, and arts and humanities. Because we are interested in capturing investment in scientific research, we focus only on the hard sciences section of WoK. This section includes publication records over the period 1970-2007. The address field on each record indicates the affiliation of the authors of the publication. This affiliation is typically either a research institution or a firm. We use the name appearing in this field and match it to the complete list of Amadeus and Icarus firms. We follow the same matching procedure as described above for the EPO and USPTO patent matching. Articles may have more than one author (the median number of authors per article is 2). In this case, the address field would include multiple affiliations. We assign an academic publication to a specific firm if the name of this firm appears at least once in the address field of the article. This procedure means that a single article can be assigned to more than one firm, but a firm cannot be assigned more than once to the same article. For each article, we also extract information on the number of times it was cited, the journal in which it was published, and the year of publication. Finally, research institutions can be

25

incorporated, thus, they appear in Amadeus or Icarus as potential firms to be matched. To screen out such firms, we follow two steps. First, as for patent matching, we drop Amadeus names that include strings that are associated with research institutions (such as UNIVERSITY, RESEARCH, INSTITUTION, etc.). Second, we manually examine the websites of firms that have a large number of publications but appear as small firms in terms of their sales and number of patents. For these firms, we check whether their primary activity is research. In case the primary activity is research, we exclude them from our matched sample.

Variable # firms Mean Std. Dev. 10th 50th 90th

Firm Value ($, mm) 33,920 182 297 5 60 520

Net Assets ($, mm) 33,920 91 143 2 31 266

Tobin's Q ($, mm) 33,920 9.1 150 0.7 2 9.4

Sales ($, mm) 29,827 137 193 5 53 409

Profits ($, mm) 24,554 23 53 -2 7 72

% of Share Acquired 33,920 0.55 0.42 0.04 0.51 1

USPTO Patents Stock, Count 5,471 12 137 1 2 23

USPTO Patents Stock, Citations-Weighted 5,471 12 96 0 2 25

EPO Patents Stock, Count 4,108 9 57 0 2 17

EPO Patents Stock, Citations-Weighted 4,108 8 67 0 2 16

Publications Stock, Count 1,557 3.6 21.3 0.12 0.72 6.0

Publications Stock, Citations-Weighted 1,557 0.1 28.8 0.01 0.09 6.4

TABLE 1-

SUMMARY STATISTICS FOR MAIN VARIABLESDistribution

Notes: This table reports summary statisitics for the main variable used in the estimation. The sample includes M&Atransactions from SDC Platinum between in the period 1985-2007. Firm value is the ratio between total deal value andacquired equity. Tobin's Q is the ratio between Firm Value and Net Assets . Patents stock and academic publicationsstock are computed using the perpetual inventory method using a depreciation rate of 15 percent. Patent data from theUSPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patentsand publications by citations by dividing the number of citations they receive by the average number of citations receivedby all patents and publications in the same year. Robust standard errors are in brackets.

Year # firms % Patent in the USPTO % Patent in the EPO % Publish

1985 76 100.0% 50.0% 28.9%

1986 142 95.8% 54.9% 22.5%

1987 184 93.5% 57.1% 11.9%

1988 265 90.9% 57.7% 21.1%

1989 315 92.4% 61.9% 21.9%

1990 319 89.0% 66.8% 27.6%

1991 269 88.5% 64.7% 23.8%

1992 287 89.2% 71.1% 20.6%

1993 312 87.2% 69.6% 20.5%

1994 403 92.8% 62.3% 22.6%

1995 339 95.9% 61.9% 22.4%

1996 397 94.0% 60.5% 19.1%

1997 392 92.9% 65.8% 22.9%

1998 106 93.4% 62.3% 14.2%

1999 437 85.8% 72.3% 18.8%

2000 269 91.1% 65.4% 14.9%

2001 174 87.9% 72.4% 18.4%

2002 277 86.3% 70.4% 13.7%

2003 243 86.4% 77.4% 18.1%

2004 35 91.4% 74.3% 8.6%

2005 289 80.6% 75.1% 17.3%

2006 396 78.8% 76.8% 16.2%

2007 209 81.8% 75.6% 11.5%

Total 6,135 89.2% 67.0% 19.6%

TABLE 2-

INNOVATING FIRMS ACROSS YEARS

Notes: This table reports the number of innovating firms for each year in our sample. We include onlyfirms that have at least one patent, or academic publication by their acquistion year. % patent in theUSPTO is the percenatge of firms that have at least one patent in the USPTO out of all innovating firmsin the same year. % patent in the EPO and % publishing are the respective figures for firms that hold atleast one EPO patent or academic publication.

Variable# of deals Mean Median # of deals Mean Median # of deals Mean Median # of deals Mean Median

Firm Value ($, mm) 4,995 196 70 9,007 146 42 9,327 201 74 10,591 188 63

Net assets ($, mm) 4,995 99 37 9,007 78 22 9,327 93 35 10,591 96 33

Tobin's Q ($, mm) 4,995 6.8 2 9,007 11 2 9327 9 2.1 10,591 8.6 2

Sales ($, mm) 4,354 167 75 7,905 121 41 8,295 133 52 9,273 139 58

Profits ($, mm) 2,752 38 15 6,385 21 5 6,978 24 8 8,439 19.9 5.4

% of Share Acquired 4,995 0.57 0.66 9,007 0.52 0.45 9,327 0.6 0.7 10,591 0.55 0.5

USPTO Patents Stock, Count 1,200 13 2.4 1,465 10.3 2.3 1,456 9 2 1,350 17.2 2.1

USPTO Patents Stock, Citations-Weighted 1,200 13 1.7 1,465 12.7 1.7 1,456 10 1 1,350 13.6 1.7

EPO Patents Stock, Count 782 7.8 1.8 1,056 8.7 2.1 1,056 7.4 1.8 1,214 9.6 2.0

EPO Patents Stock, Citations-Weighted 782 7.3 1.3 1,056 8.0 1.7 1,056 6.8 1.5 1,251 9.8 1.8

Publications Stock, Count 358 2.2 0.6 457 3.3 0.72 397 2.6 0.7 345 6.4 0.8

Publications Stock, Citations-Weighted 358 1.9 0.1 457 4.7 0.06 397 3.2 0.1 345 7.4 0.4

Notes: This table provides summary statistics both at the firm level and at the group level for our sample. The ownership structure is for 2007. Financial data is for 2006 or the most recent year data is available. Firms are included in the sample if we have information on their: (i) ownership structure, (ii) employment, and (iii) sales, where their annual sales are greater than one million dollars and they have between 50 and 10 thousand employees. Firm Age is the number of years since the date of incorporation. Cash Flow is net income plus depreciation. Number of Affiliates, Total is the number of all group affiliates including ones that are not in the estimation sample. Number of Affiliates, Sample is the number of group affiliates that are included in the estimation sample.

1991-1995

TABLE 3-

SUMMARY STATISTICS FOR MAIN VARIABLES FOR DIFFERENT TIME PERIODS

1985-1990 1996-2000 2001-2007

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

Patents and publications:

Firms: All All All All All All Allinnov-ating

All All All Allinnov-ating

High-Tech

log(1+USPTO Patents Stock)t-1 0.121*** 0.054*** 0.110*** 0.049*** 0.016 0.081*** 0.123*** 0.077*** 0.052*** 0.070***(0.008) (0.011) (0.009) (0.012) (0.013) (0.011) (0.009) (0.011) (0.012) (0.012)

log(1+EPO Patents Stock)t-1 0.158*** 0.111*** 0.146*** 0.106*** 0.086*** 0.093*** 0.151*** 0.087*** 0.064*** 0.086***(0.010) (0.014) (0.011) (0.014) (0.014) (0.014) (0.011) (0.014) (0.014) (0.014)

log(1+Publications Stock)t-1 0.186*** 0.090*** 0.083*** 0.069** 0.043 0.084*** 0.084*** 0.065** 0.047 0.067**(0.029) (0.031) (0.031) (0.031) (0.033) (0.032) (0.033) (0.033) (0.034) (0.033)

log(Total Assets) 0.718*** 0.719*** 0.723*** 0.718*** 0.718*** 0.719*** 0.718*** 0.705*** 0.717*** 0.718*** 0.719*** 0.717*** 0.702*** 0.704***(0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.004) (0.010) (0.004) (0.004) (0.004) (0.004) (0.010) (0.005)

Two-digit industry dummies (79) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies (37) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2 0.655 0.655 0.654 0.656 0.655 0.656 0.656 0.647 0.656 0.656 0.656 0.656 0.653 0.624

Observations 33,920 33,920 33,920 33,920 33,920 33,920 33,920 6,491 33,920 33,920 33,920 33,920 6,491 27,334

Dependent variable: log(Firm Value)

Notes: This table reports the results of OLS regressions that examine the relationship between firm value and patent and publication stocks. The sample includes M&A transactionsfrom SDC Platinum between in the period 1985-2007. Patents stock and academic publications stock are computed using the perpetual inventory method using a depreciation rate of15 percent. Patent data from the USPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patents and publications by citationsby dividing the number of citations they receive by the average number of citations received by all patents and publications in the same year. Robust standard errors are in brackets.Column 8 includes only firms that have at least one patent from the EPO or USPTO, or at least one scientific publication. Column 14 includes all deals that are classified as "high-tech"in SDC Platinium. * significant at 10%; ** significant at 5%; *** significant at 1%.

TABLE 4-

FIRM VALUE AND INNOVATION

Counts (not weighted) Citations-Weighed

` (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)

Patents and publications:

Period:

log(1+USPTO Patents Stock)t-1 0.076*** 0.046*** 0.096*** 0.050** 0.144*** 0.077*** 0.119*** 0.013 0.083*** 0.060*** 0.113*** 0.079*** 0.158*** 0.112*** 0.134*** 0.048*(0.015) (0.018) (0.018) (0.024) (0.022) (0.026) (0.017) (0.026) (0.015) (0.018) (0.016) (0.024) (0.021) (0.025) (0.018) (0.025)

log(1+EPO Patents Stock)t-1 0.066*** 0.080*** 0.112*** 0.159*** 0.055** 0.064** 0.087*** 0.134***(0.024) (0.028) (0.030) (0.031) (0.025) (0.028) (0.029) (0.029)

log(1+Publications Stock)t-1 0.117*** 0.115*** 0.155*** 0.129*** 0.080 0.054 0.025 -0.001 0.142*** 0.141*** 0.123*** 0.105*** 0.108 0.086 0.011 -0.017(0.037) (0.038) (0.039) (0.041) (0.108) (0.111) (0.041) (0.041) (0.037) (0.038) (0.037) (0.039) (0.112) (0.116) (0.043) (0.043)

log(Total Assets) 0.729*** 0.728*** 0.730*** 0.730*** 0.729*** 0.729*** 0.696*** 0.695*** 0.729*** 0.729*** 0.730*** 0.730*** 0.729*** 0.725*** 0.696*** 0.694***(0.010) (0.010) (0.008) (0.008) (0.008) (0.008) (0.007) (0.007) (0.010) (0.010) (0.008) (0.008) (0.008) (0.011) (0.007) (0.007)

Two-digit industry dummies (79) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies (37) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2 0.711 0.711 0.671 0.671 0.650 0.650 0.630 0.631 0.711 0.712 0.671 0.672 0.651 0.651 0.630 0.631

Observations 4,995 4,995 9,007 9,007 9,327 9,327 10,591 10,591 4,995 4,995 9,007 9,007 9,327 9,327 10,591 10,591

Notes: This table reports the results of OLS regressions that examine the relationship between firm value and patent and publication stocks for different time periods. The sample includesM&A transactions from SDC Platinum between in the period 1985-2007. Patents stock and academic publications stock are computed using the perpetual inventory method using adepreciation rate of 15 percent. Patent data from the USPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patents and publicationsby citations by dividing the number of citations they receive by the average number of citations received by all patents and publications in the same year. Standard errors (in brackets) arerobust to arbitrary heteroskedasticity and allow for serial correlation through clustering by ultimate owner. * significant at 10%; ** significant at 5%; *** significant at 1%.

TABLE 5-

VALUE-INNOVATION RELATIONSHIP OVER TIME

Dependent variable: log(target firm value)

1985-1990 1991-1995 2001-2007 1985-19901996-2000 1996-2000

Counts Weighted by citations

1991-1995 2001-2007

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)

Firms:

Patents and publications:

Period: All1985-1997

1998-2007

2001-2007

All1985-1997

1998-2007

2001-2007

All1985-1997

1997-2007

2001-2007

All1985-1997

1997-2007

2001-2007

log(1+USPTO Patents Stock)t-1 0.062*** 0.078*** 0.033 0.023 0.100*** 0.101*** 0.080*** 0.077** 0.041*** 0.034** 0.038 -0.003 0.063*** 0.056*** 0.068*** 0.017(0.019) (0.023) (0.033) (0.041) (0.018) (0.022) (0.030) (0.037) (0.015) (0.017) (0.027) (0.003) (0.014) (0.017) (0.027) (0.033)

log(1+EPO Patents Stock)t-1 0.073*** 0.074*** 0.087** 0.110** 0.048** 0.061** 0.052 0.072 0.126*** 0.095*** 0.170*** 0.194*** 0.113*** 0.078*** 0.151*** 0.180***(0.023) (0.026) (0.039) (0.048) (0.022) (0.026) (0.037) (0.045) (0.018) (0.021) (0.032) (0.040) (0.018) (0.022) (0.031) (0.039)

log(1+Publications Stock)t-1 0.097*** 0.099*** 0.077 0.051 0.058 0.057 0.051 0.016 0.040 0.136*** -0.092 -0.062 0.058 0.180*** -0.094 -0.063(0.039) (0.041) (0.073) (0.083) (0.039) (0.042) (0.074) (0.082) (0.045) (0.054) (0.066) (0.040) (0.049) (0.058) (0.072) (0.047)

log(Total Assets) 0.727*** 0.751*** 0.701*** 0.701*** 0.726*** 0.751*** 0.701*** 0.701*** 0.710*** 0.719*** 0.700*** 0.689*** 0.710*** 0.719*** 0.700*** 0.689***(0.006) (0.009) (0.009) (0.011) (0.006) (0.009) (0.009) (0.011) (0.005) (0.007) (0.008) (0.009) (0.005) (0.007) (0.008) (0.009)

Two-digit industry dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2 0.677 0.704 0.651 0.661 0.677 0.704 0.651 0.661 0.643 0.668 0.617 0.617 0.643 0.669 0.622 0.617

Observations 14,578 7,673 6,905 4,449 14,578 7,673 6,905 4,449 19,342 10,647 8,695 6,142 19,342 10,647 8,862 6,142

TABLE 6-

WITHIN AND BETWEEN-INDUSTRY ACQUISITIONS

Dependent variable: log(target firm value)

Notes: This table reports the results of OLS regressions that examine the relationship between firm value and patent and publication stocks for different time periods, for within and between industry acquisitions. Thesample includes M&A transactions from SDC Platinum between in the period 1985-2007. Patents stock and academic publications stock are computed using the perpetual inventory method using a depreciation rateof 15 percent. Patent data from the USPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patents and publications by citations by dividing the number ofcitations they receive by the average number of citations received by all patents and publications in the same year. Robust standard errors are in brackets. * significant at 10%; ** significant at 5%; *** significant at 1%.

Count Weighted by citations

Target and Acquirer in the same SIC code Target and Acquirer in different SIC codes

Count Weighted by citations

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)

Deals:

Period: All1985-1997

1998-2007

2001-2007

All1985-1997

1998-2007

2001-2007

All1985-1997

1997-2007

2001-2007

All1985-1997

1997-2007

2001-2007

log(1+USPTO Patents Stock)t-1 0.091*** 0.079*** 0.096*** 0.077*** 0.042 0.059 0.015 -0.039 0.053*** 0.050*** 0.049* 0.041 0.047* 0.206*** -0.025 -0.020(0.012) (0.014) (0.023) (0.028) (0.029) (0.040) (0.041) (0.055) (0.013) (0.014) (0.029) (0.040) (0.025) (0.050) (0.028) (0.033)

log(1+EPO Patents Stock)t-1 0.076*** 0.061*** 0.101*** 0.118*** 0.129*** 0.107*** 0.146*** 0.198*** 0.067*** 0.060*** 0.088*** 0.063 0.141*** 0.087** 0.183*** 0.184***(0.015) (0.018) (0.027) (0.033) (0.035) (0.043) (0.052) (0.065) (0.016) (0.018) (0.036) (0.050) (0.026) (0.042) (0.031) (0.036)

log(1+Publications Stock)t-1 0.071* 0.135*** -0.010 -0.008 0.026 0.168*** -0.090 -0.079 0.129*** 0.154*** 0.082 0.039 -0.080 0.042 -0.117 -0.076(0.037) (0.045) (0.058) (0.041) (0.076) (0.069) (0.123) (0.170) (0.035) (0.042) (0.057) (0.061) (0.063) (0.076) (0.074) (0.058)

log(Total Assets) 0.722*** 0.737*** 0.706*** 0.702*** 0.676*** 0.694*** 0.660*** 0.650*** 0.715*** 0.731*** 0.678*** 0.706*** 0.711*** 0.724*** 0.701*** 0.690***(0.004) (0.006) (0.006) (0.008) (0.010) (0.016) (0.014) (0.017) (0.006) (0.007) (0.012) (0.016) (0.005) (0.008) (0.007) (0.008)

Two-digit industry dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2 0.667 0.693 0.638 0.642 0.616 0.631 0.613 0.617 0.662 0.690 0.600 0.647 0.657 0.670 0.644 0.633

Observations 27,778 15,476 12,302 8,432 6,142 2,844 3,298 2,159 14,407 10,304 4,103 2,093 19,513 8,016 11,497 8,498

Notes: This table reports the results of OLS regressions that examine the relationship between firm value and patent and publication stocks for different time periods, for within and between industry acquisitions. Thesample includes M&A transactions from SDC Platinum between in the period 1985-2007. Patents stock and academic publications stock are computed using the perpetual inventory method using a depreciation rateof 15 percent. Patent data from the USPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patents and publications by citations by dividing the number ofcitations they receive by the average number of citations received by all patents and publications in the same year. Robust standard errors are in brackets. * significant at 10%; ** significant at 5%; *** significant at 1%.

TABLE 7-

WITHIN AND BETWEEN-COUNTRY ACQUISITIONS

Dependent variable: log(target firm value)

Within-country Between-countries American targets Non-American targets

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16)

Target's country:

Period: All1985-1997

1998-2007

2001-2007

All1985-1997

1998-2007

2001-2007

All1985-1997

1997-2007

2001-2007

All1985-1997

1997-2007

2001-2007

log(1+USPTO Patents Stock)t-1 0.060*** 0.048*** 0.065*** 0.041 0.022 0.164*** -0.039 -0.026 0.045*** 0.038*** 0.054* 0.033 0.043*** 0.035* 0.052* 0.022(0.011) (0.014) (0.021) (0.026) (0.025) (0.048) (0.028) (0.034) (0.013) (0.015) (0.031) (0.042) (0.015) (0.019) (0.027) (0.035)

log(1+EPO Patents Stock)t-1 0.051*** 0.031* 0.085*** 0.120*** 0.093*** 0.020 0.149*** 0.169*** 0.051*** 0.037* 0.102*** 0.054 0.070*** 0.055*** 0.091*** 0.110***(0.015) (0.018) (0.027) (0.034) (0.029) (0.047) (0.035) (0.042) (0.018) (0.020) (0.041) (0.055) (0.017) (0.020) (0.031) (0.040)

log(1+Publications Stock)t-1 0.069*** 0.147*** -0.024 -0.017 -0.086 0.036 -0.120 -0.079 0.132*** 0.160*** 0.079 0.042 0.037 0.121*** -0.085* -0.127**(0.033) (0.039) (0.052) (0.044) (0.062) (0.072) (0.074) (0.058) (0.035) (0.042) (0.056) (0.062) (0.026) (0.029) (0.045) (0.050)

Dummy for multiple jurisdictions 0.143*** 0.176*** 0.086* 0.056 0.172*** 0.220*** 0.120*** 0.049 0.071** 0.112*** -0.049 0.047 0.070 0.166** 0.001 -0.058(0.027) (0.032) (0.048) (0.061) (0.044) (0.062) (0.058) (0.071) (0.036) (0.039) (0.084) (0.114) (0.050) (0.074) (0.072) (0.089)

log(Total Assets) 0.716*** 0.731*** 0.700*** 0.694*** 0.710*** 0.723*** 0.700*** 0.689*** 0.714*** 0.731*** 0.678*** 0.706*** 0.686*** 0.698*** 0.659*** 0.649***(0.004) (0.005) (0.006) (0.007) (0.005) (0.008) (0.007) (0.008) (0.006) (0.007) (0.012) (0.016) (0.012) (0.017) (0.019) (0.021)

Two-digit industry dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2 0.656 0.682 0.628 0.631 0.658 0.670 0.644 0.633 0.662 0.690 0.600 0.647 0.651 0.700 0.606 0.598

Observations 33,920 18,320 15,600 10,591 19,513 8,016 11,497 8,498 14,407 10,304 4,103 2,093 4,108 2,336 1,772 1,214

Notes: This table reports the results of OLS regressions that examine the relationship between firm value and the firm global technological base. Dummy for multiple jurisdictions receives the value of one for firms thatpatent both in the USPTO and EPO prior the acquisition completion year, and zero for all other firms. Patents stock and academic publications stock are computed using the perpetual inventory method using adepreciation rate of 15 percent. Patent data from the USPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patents and publications by citations by dividing thenumber of citations they receive by the average number of citations received by all patents and publications in the same year. Columns 13-16 include only firms that have at least one patent in the EPO prior theacquisition completion year. Robust standard errors are in brackets. * significant at 10%; ** significant at 5%; *** significant at 1%.

TABLE 8-

MULTIPLE JURISDICTIONS PATENTING

Dependent variable: log(target firm value)

All Non-American American targets Only EPO patenteers

(1) (2) (3) (3) (4) (5) (6) (6) (4) (5) (6) (6) (7) (8) (9) (9)

Industry:

Period: All1985-1997

1998-2007

2001-2007

All1985-1997

1998-2007

2001-2007

All1985-1997

1998-2007

2001-2007

All1985-1997

1998-2007

2001-2007

log(1+USPTO Patents Stock)t-1 0.078** 0.092*** -0.015 -0.100 0.008 0.053 -0.057 -0.024 0.104*** 0.037 0.200*** 0.166*** 0.121*** 0.132* 0.120** 0.162***(0.035) (0.036) (0.083) (0.108) (0.050) (0.067) (0.070) (0.097) (0.025) (0.030) (0.042) (0.054) (0.050) (0.080) (0.062) (0.068)

log(1+EPO Patents Stock)t-1 0.102*** 0.023 0.287*** 0.397*** 0.082 0.086 0.114 0.073 0.113*** 0.114*** 0.110** 0.112 0.048 -0.044 0.085 0.118(0.039) (0.043) (0.087) (0.106) (0.054) (0.081) (0.076) (0.091) (0.034) (0.041) (0.057) (0.074) (0.088) (0.120) (0.110) (0.105)

log(1+Publications Stock)t-1 0.132*** 0.145*** 0.122 0.040 0.147 0.657*** -2.032** -1.605 -0.273* 0.046*** -0.620*** -0.370** 0.285*** 0.858*** 0.006 0.133(0.047) (0.049) (0.085) (0.108) (0.510) (0.238) (1.038) (1.085) (0.163) (0.092) (0.249) (0.163) (0.266) (0.200) (0.131) (0.102)

log(Total Assets) 0.681*** 0.716*** 0.640*** 0.615*** 0.667*** 0.641*** 0.690*** 0.717*** 0.678*** 0.694*** 0.654*** 0.643*** 0.660*** 0.715*** 0.634*** 0.655***(0.018) (0.027) (0.023) (0.026) (0.026) (0.039) (0.036) (0.046) (0.017) (0.023) (0.026) (0.025) (0.020) (0.032) (0.025) (0.028)

Two-digit industry dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Year dummies Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

R2 0.640 0.684 0.593 0.586 0.608 0.618 0.594 0.590 0.663 0.694 0.635 0.648 0.590 0.669 0.551 0.589

Observations 1,406 710 696 510 1,034 507 527 349 1,630 922 708 496 1,111 381 730 542

TABLE 9-

INDUSTRIES

Tellecomunications

Notes: This table reports the results of OLS regressions that examine the relationship between firm value and patent and publication stocks for different time periods, for selected industries. The sampleincludes M&A transactions from SDC Platinum between in the period 1985-2007. Patents stock and academic publications stock are computed using the perpetual inventory method using a depreciationrate of 15 percent. Patent data from the USPTO covers the period 1975-2007, and patents data from the EPO covers the period 1979-2007. We weight patents and publications by citations by dividingthe number of citations they receive by the average number of citations received by all patents and publications in the same year. Robust standard errors are in brackets. * significant at 10%; ** significantat 5%; *** significant at 1%.

Computers and Electronics Information Technology

Dependent variable: log(target firm value)

Drugs and Chemicals