Licensing agreements as signals of innovation: When do they impact market value?

Abstract

This paper explains the performance outcomes of markets for technology. It examines whether, and in what context, licensing agreements function as signals of innovativeness that influence investors' evaluation of public companies and if they are consistent ex post the announcement. Joining the literature on markets for technology and signalling theory, it distinguishes the outcomes related to the expectation and the confirmation of the signal, while investigating the context in terms of a company's analyst coverage. This distinction is addressed based on an empirical strategy that draws on a sample of 99 companies (2006–2012) and relates the investing community's reaction to both abnormal stock market returns in the day of the announcement and to Tobin's q one year after. The results show neither immediate nor ex post effects for outward agreements, and negative immediate and ex post effects for inward agreements, which are muted for companies with extensive analyst coverage. They thus suggest that inward licenses are relevant negative signals and that the value of signals is maintained across time horizons. Our theory development introduces analyst coverage as a contingency under which licensing agreements represent a weaker signal. Our research thus warns managers against publicly announcing their licensing strategies.