Innovation alpha: What Do IP-Intensive Stock Price Indexes Tell Us about Innovation?

Patents and other intellectual property (IP) have grown in relative importance in investments and market capitalizations of public firms (e.g., Corrado and Hulten 2010). This paper illustrates the construction of IP-intensive stock price indexes, focusing on a network analysis tool (Martin 2001, Winer et al. 2003, Luse and Martin 2014) that helps pinpoint firms that are most likely to generate value from their intangible assets. The analysis finds that (a) stock price indexes constructed using the tool yield above-average returns and (b) stock prices of US companies in two tech-driven sectors outperform non-US firms despite lower average patent portfolio valuations.