Patent-to-Market Premium

Abstract

A firm’s patent-to-market (PTM) ratio refers to the percentage of a firm’s market value that is attributable to its patent market value. A hedging portfolio based on PTM ratio generates a monthly return of 71 basis points. The CAPM cannot be rejected for firms with low PTM ratios, but is rejected for firms with high PTM ratios. PTM ratio is a priced factor distinct from known factors in the cross-section of stock returns. PTM ratio is positively associated with future profitability. Our analysis suggests that real option is the channel through which PTM ratio predicts future stock returns.