Intellectual Capital in a Q‐Theory of Ag‐Biotech Mergers

Abstract

Tobin’s Q-theory of investment has been linked to firm merger activity by Jovanovic and Rousseau (JR). They showed that firms with higher Q-values, that is the ratio of market to book values, tend to be the ones buying other firms and not the ones being acquired. Market values should theoretically equal book values—a firm’s assets as they appear on the balance sheet equal to their cost, less accumulated depreciation. In reality, book value often differs from market value, especially in knowledge-intensive industries, indicating the premium above-measurable assets that shareholders are willing to pay for a company’s unique combination of market position, tangible and intangible capital, goodwill, and other favorable characteristics. Firms with greater Q-values are in a position to acquire more capital, possibly through mergers and acquisitions, to make further use of their advantages. This article extends the JR analysis to consider the role of intellectual capital in merger activity. We analyze the connection between intangible capital and the Q-theory of mergers in the agricultural biotechnology (ag-biotech) industry. This industry underwent significant technological change beginning in the late 1980s as new biotechnology techniques were integrated with plant breeding and other agricultural practices. The number of patent applications in the field grew from less than a 100 a year in the late 1980s to more than 500 applications per year by the mid 1990s (Bennett et al.). Along with this technological change,