AN EMPIRICAL STUDY OF FIRMS’ ECONOMIC PERFORMANCE WITH KNOWLEDGE STOCKS

Abstract

Non-financial representations of innovation such as patent and citation counts are alternative measures, apart from traditional financial measures such as research and development (R&D) investments, increasingly used as proxies for intangible assets. Hall, Jaffe and Trajtenberg (2005) coined the term “knowledge stocks” which they describe as a cascading measure of the knowledge-creation process, a continuum going from R&D to patents to citations. Hence, this study investigates the relationship of these knowledge stock ratios with firms’ ex-ante and ex-post economic performance, using growth opportunities (GO) and holding period returns (HPR) as proxies respectively, in the context of industry-wide and firm-specific effects. Empirical findings indicate that a mix of knowledge stock ratios do demonstrate significantly positively correlations with growth opportunities (GO) across industry-wide as well as firmspecific studies. However, holding period returns for 12 months (HPR12) did not show significant results while holding period returns for 36 months (HPR36) were significantly negatively correlated with knowledge stock ratios. Nevertheless, there is consistent evidence present to suggest that the reason for this outcome is due to the time period selection that coincides with the rise and decline of the internet stock bubble. More importantly, the results of conducting both studies, using both ex-ante and ex-post measures of firms’ economic performance reveals that a solo examination using holding period returns (HPR) per se is dangerous as it would yield an incomplete and inaccurate picture of the relationship of firms’ economic performance with knowledge stock ratios. Thus, it is recommended that future studies examine both ex-ante and ex-post measures of economic performances especially in relation to intangible assets - intellectual capital such as R&D, patents and citations.