Review of Quantitative Finance and Accounting, 9 (1997): 131–146
© 1997 Kluwer Academic Publishers, Boston. Manufactured in The Netherlands.
The Relation Between Patent Citations and Tobin’s Q
in the Semiconductor Industry
Odyssey Partners, NY, NY 10019
Professor, Department of Finance, The George Washington School of Business and Public Management,
Washington, DC 20052
Abstract. The market value of a ﬁrm is largely determined by the expected returns to the ﬁrm’s tangible and
intangible assets. However, accounting data generally excludes intangible assets. Financial variables which are
constructed in part from accounting data, such as Tobin’s Q, are thus biased. If measures of intangible capital
are successful in explaining variation in Q, then a case can be made for incorporating such measures into future
research. In high technology industries, such as the semiconductor industry, valuing a ﬁrm’s intangible assets
requires the valuation of its technological capital. Past studies have relied heavily on simple patent counts and
research and development expenditures to quantify the technological component of a ﬁrm’s intangible assets.
This paper examines the ability of measures of intangible capital to explain variation in Q and considers an
additional data source, patent citations. We ﬁnd that stock variables created from citation data contain relevant
information about the market’s valuation of intangible assets.
Key words: Citation, Intangible Capital, Patent, Semiconductor, Tobin’s Q
According to ﬁnancial theory, the market value of a ﬁrm is equal to the discounted value
of its future cash ﬂows. The assets that generate these cash ﬂows can be characterized as
either tangible or intangible. While there is no perfect separation between tangible and
intangible assets, a reasonable distinction can be made on the basis of whether the book
value of the asset is recorded on the ﬁrm’s balance sheet. In the case of tangible assets,
one can estimate their value, also referred to as replacement cost, on the basis of their
A ﬁrm’s intangible assets, which are “nonphysical, noncurrent rights that
give a ﬁrm exclusive or preferred position in the market place … such assets include
patents, copyrights, capitalized advertising, and capitalized research and development
, are by their very nature more difﬁcult to value. The type of intangible assets as
well as the proportion of a ﬁrm’s intangible assets to total assets varies widely from
industry to industry and from ﬁrm to ﬁrm. In many high-technology industries such as the
semiconductor industry, a major component of a ﬁrm’s assets are intangible assets with
much of the intangible assets being generated from research and development activities.
@ats-ss11/data11/kluwer/journals/requ/v9n2art2 COMPOSED: 08/13/97 10:58 am. PG.POS. 1 SESSION: 11