Review of Quantitative Finance and Accounting, 17: 223–235, 2001
2001 Kluwer Academic Publishers. Manufactured in The Netherlands.
Value Relevance of Nonﬁnancial Information:
The Case of Patent Data
VERNON J. RICHARDSON AND SUSAN SCHOLZ
School of Business, University of Kansas
Abstract. When used in conjunction with traditional R&D expenditure information, scientiﬁc information on
patent quality appear to give investors a more useful basis upon which to judge the economic merit of the ﬁrm’s
R&D effort. This complementary relation suggests that consistent disclosure of patent quality information would
be helpful to investors in their ongoing assessment of ﬁrms in the high tech sector.
Key words: valuation, patent quality, R&D expenditures
JEL Classiﬁcation: G31, M4, O31
Accounting information gives a useful perspective on the economic value of the ﬁrm that
is historical, logical and consistent. In contrast, stock market valuations reﬂect a forward-
looking viewpoint on the value of the ﬁrm’s future cash ﬂows. Differences between the
historical accounting perspective and the stock market’s forward-looking perspective are to
be expected. The practical value of accounting numbers is enhanced to the extent that such
data can be proﬁtably used by investors as indicators of corporate health in their ongoing
assessment of the ﬁrm’s economic prospects. Unfortunately, Brown, Lo and Lys (1999)
document a long-term decline in the relevance of ﬁnancial statement information as an
important determinant of the market value of the ﬁrm. Controlling for size effects, they
ﬁnd that there has been a dramatic decline in the value relevance of ﬁnancial statement
information during the post-World War II period. This and related ﬁndings have fed a
growing concern among both academics and practitioners that corporate ﬁnancial statements
have lost a signiﬁcant portion of their relevance for investors (Francis and Schipper, 1999).
This concern has given rise to a number of research and accounting policy initiatives with
the common goal to improve the practical relevance of ﬁnancial reporting. Not only is
value relevance a signiﬁcant practical matter in the United States, growing concern over
the harmonization of global accounting standards has focused attention of the volatility of
accounting income and cash ﬂow numbers and market values (Pownall and Schipper, 1999).
Address correspondence to: Mark Hirschey, School of Business, University of Kansas, 1300 Sunnyside Avenue,
Lawrence, KS 66045-7585, Fax: 785.864.5328, E-mail: firstname.lastname@example.org