If you ever turn an Apple product and read the fine print it will say “Designed by Apple in California. Manufactured in China”. With the advent of globalization, a customer in today's economy doesn't value where a product is being manufactured but bases his decision while making a transaction on parameters like brand value, marketing and innovations in design and technology (Michael Mandel, 2006). This means production today requires skills, a differentiating factor and state of the art processes over and above the traditional capital and labor (Brynjolfsson, Hitt, & Yang, 2002). This class of assets providing value to a customer in todays market are called intangible assets. According to the Indian Accounting Standard:
“An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.” (ICAI, 2002)
Examples of intangible assets include, but is not limited to, software, patents, copyrights, brand recognition, trade secrets, import quotas, franchises, customer loyalty and market share.
From 1975 to 2015, intangible assets as a percentage of S&P500 market value has increased from 17% to 87% (Ocean Tomo, 2015). A striking example of this shifting reliance towards intellectual property is our seemingly “primitive” farming industry. The fruits and vegetables grown earlier were only labor and capital intensive. With the green revolution and the dawn of biosciences this industry is now reliant on the proprietary seeds, pesticides and fertilizers for maximizing crop yield. According to Leadbeater, the corn crop which we eat today is more productive to grow today than it was 50 years ago. To put things into perspective, on an average each acre of farmland now produces 80% more corn than it did 50 years ago because of scientific advancements (Leadbeater, 1999). This established importance of intangible assets makes it important for us to account for them during portfolio evaluations and transactions like trading and mergers and acquisitions.
The aim of this paper is to review in more depth one particular sub-class of intangible assets: patents, which are governmental rights on a solution to an existing problem. It is a type of a monopoly which grants statutory rights to the assignee to exploit his solution via manufacturing, selling or licensing for a limited time in exchange for a public disclosure of the invention (WIPO, 2004). Patents have been instrumental in the success of companies in several ways like by redefining the sector landscape via breakthrough technology or by establishing competitive advantages to prevent competitors from taking market share. Therefore, patents hold tremendous value for the assignee or the organization that has been granted the monopoly. This right can in turn have serious implications on the operational and financial performance of its competitors. For instance, a new patent can give a cost benefit to the assignee thus making it necessary for the competitor to cut down profits to maintain market share. As an extreme the patent can be so revolutionary that it may discontinue the competitors' product leading to serious repercussions on the competitors' stock price.
There have been various studies dedicated to determine the economic and monetary benefits awarded by patents to its assignee but there is no consensus amongst experts on the universal applicability of each method (for details on each method refer (Gu & Lev, 2001; Rodov & Leliaert, 2002)). The most recent and advanced development achieved in this domain is by Kogan et. al. who came up with a model that assigns patents economic value by observing variables like stock price response in a set period of time and future citations (Kogan, Papanikolaou, Seru, & Stoffman, 2012). As explained by Yichen Ding in his paper, we are building on their work and conducting a holistic industry specific analysis by studying the impact of patent issuance on the performance of the stocks of the assignees competitors. By doing so we expect to build a more robust model that takes into account the industry developments that have a significant impact on the value of an issued patent and in turn on the value of the firm. As further explained by Nicholas Yuk in his paper we are using the event study methodology (for details on event study methodology refer (MacKinlay, 1997)) where-in we will leverage statistics, economics and finance for studying an event or a series of events and see its impact on the value of a firm and its competitors.
The development of this model will attract many suitors given that there is no current competition in the field. We envisage counter-traders to be our primary stakeholders. In the event study methodology, we see that the effects of the movement of the stock are evident a few days before the actual news (Good or Bad) is broken to the public. This is because traders are always looking for insights into the functioning and the R&D activities of a company based on information leaks. They do so to hedge or strengthen their position in order to gain maximum profit or minimize loss. With the help of our model these traders will be equipped with better arsenal to make informed decisions during such events.
Major financial firms that value Mergers and Acquisitions will also be interested in our development. There is no universal agreement till date () on the method to be used to value intangible assets. In this environment on data driven finance, our model will aid organizations to reach a more fact based number for transactions. Investors, private equity funds and Portfolio evaluators will also be interested in our developments.
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