Patenting activity, firm innovation characteristics, and financial performance: An empirical investigation

This study investigates whether firm innovation characteristics and patenting activity are incrementally informative in terms of predicting future financial performance for a sample of publicly traded U.S. based firms. It also investigates how a firms' patenting activity might have a mediating effect in the relationship between innovation characteristics and financial performance. Projecting the future performance of high technology firms is a particularly difficult task. Due to the inherently historical focus of financial accounting data, it has limited utility in terms of informing users about a firm's future prospects. The success of high-techs depends upon up-to-date technological development, yet this aspect of firm activity is not reflected in financial reports. This study aims to address this complex issue. Building upon existing literature, this study will make three important contributions to the field: first, by exploring the relationships among intangibles, patenting activity, and financial performance; second, by addressing the existing literature related to the value-relevance of nonfinancial performance measures by using six patent measures to empirically test a model that includes firm innovation characteristic (intangibles, research and development and accounting goodwill) to predict financial performance (ROA, ROS and ROE); and third, by using structural equation modeling to simultaneously test four research hypotheses. Results from this study indicate that while goodwill and intangibles can directly influence financial performance, research and development's relationship with future financial performance is mediated by five patenting activity measures. Results also show that a firm's patenting activity can be predicted by firm innovation characteristics, with research and development serving as the strongest predictor of patenting activity. This study's findings can benefit investors and policy makers by empirically showing the significant role nonfinancial performance measures, specifically patents, contribute to predicting firm financial performance in the high-technology sector.