Markets in Intangibles: Patent Licensing

Abstract

The absence of organized markets in intangibles has been a major hindrance to their recognition as assets in financial reports. Economic conditions, however, change fast and markets in intangibles, particularly in patents and know-how, are operating both off and on-line (Internet). We examine various valuation and disclosure aspects of the most active of these markets - the licensing of patents and know-how - which has grown substantially in recent years.

Our findings indicate that: (a) a significant nonuniformity exists in the financial reporting of royalty (licensing) income across firms, (b) royalty income is a highly relevant variable to investors, (c) in addition to being an important source of income, the intensity of patent royalties provides investors with a strong signal concerning the value and potential of R&D expenditures, and (d) given both the direct and indirect (signaling) valuation implications of royalty income, and the heightened public concern about the adequacy of information concerning intangibles, accounting standard-setters should reevaluate firms' disclosure of various aspects of patents, technology, and know-how.