Patented Knowledge Capital and Implied Equity Risk Premium

Patented knowledge capital improves transparency of research and development expenditures, converts intangible intellectual property into collateralizable and salable assets, enhances sustained competitive advantage, and lowers future financing risk and growth uncertainties. We conjecture and find that knowledge capital, proxied by stocks of patents, their forward citations and estimated market value, is associated with lower future cost of equity as well as firm risk. The reduction in equity premium impact is stronger for firms with higher marginal productivity of innovation capital, larger profitability and cash holdings, lower growth opportunities, and fewer financial constraints. These findings appear robust to potential endogeneity concerns about firms’ innovative activities, controls for technology spillovers from industry rivals, and product market competition.