A company’s market value actually increases when its known rivals innovate.
Common sense would dictate that a competitor’s breakthrough is bad news for a company. But the company’s investors might think otherwise. Anita M. McGahan, Everett W. Lord Distinguished Faculty Scholar and professor at Boston University’s School of Management, and Brian S. Silverman, J.R.S. Prichard and Ann Wilson Chair in Management at the University of Toronto’s Rotman School of Management, studied U.S. patent filings by 4,168 companies from 1975 through 1999 and subsequent moves in the capital markets. As expected, they discovered that when a company files a patent that is important — a breakthrough that is cited by many subsequent patent filings — its investors are enthusiastic. But they found that a company’s investors are also upbeat when one of its established competitors files an important patent. The company’s “Tobin’s Q” — the ratio of its financial market value (think stock market capitalization plus outstanding debt) to the replacement value of its assets — tends to increase when those filings are announced.So to the extent that investors’ sentiments include rational expectations of how the company can generate commercial value from its assets, an innovative competitor is a good thing.