46 Pages Posted: 28 Nov 2018
Date Written: November 16, 2018
A firm’s patent-to-market (PTM) ratio refers to the percentage of a firm’s market value that is attributable to its patent market value. A hedging portfolio based on PTM ratio generates a monthly return of 71 basis points. The CAPM cannot be rejected for firms with low PTM ratios, but is rejected for firms with high PTM ratios. PTM ratio is a priced factor distinct from known factors in the cross-section of stock returns. PTM ratio is positively associated with future profitability. Our analysis suggests that real option is the channel through which PTM ratio predicts future stock returns.
Keywords: Patents, Real Option, Stock Returns, Operation Performance
JEL Classification: G11, G31, O34
Suggested Citation: Suggested Citation