Do Patented Innovations Affect Cost of Equity Capital?

Abstract

We examine the hypothesis that patent grants and citations reduce the inventor’s cost of equity capital by reducing uncertainty about the eventual commercial success of the new process or product and signaling the increased likelihood of conversion of underlying growth options into assets-in-place. Using a large U.S. sample we find that the firm-level implied cost of equity capital decreases with the annual number of patent grants and citation counts but increases with the R&D expenditures. Moreover, these innovative signals result in reduced stock return volatility, lower information asymmetry, increased analyst coverage, higher future capital spending, and lower financial leverage.