Science and Technology as Predictors of Stock Performance

Innovation and technological change are the main drivers of companies' productivity and growth. But public information on companies' efforts to innovate (namely, their investment in science and technology and the consequences of that investment) is generally scant and not timely. To alleviate this impediment to the valuation of companies' performance and prospects, we examined the ability of a new set of publicly available patent-related measures to reflect science- and technology-based companies' potential and growth. We tested the ability of the patent-related measures to predict stock returns and market-to-book ratios. Our empirical results indicate that patent measures reflecting the volume of companies' research activity, the impact of companies' research on subsequent innovations, and the closeness of research and development to science are reliably associated with the future performance of R&D-intensive companies in capital markets.