Data processing: financial – business practice – management – or co – Automated electrical financial or business practice or... – Finance
Reexamination Certificate
1999-07-14
2001-01-16
Swann, Tod R. (Department: 2765)
Data processing: financial, business practice, management, or co
Automated electrical financial or business practice or...
Finance
C705S014270, C705S035000, C705S037000
Reexamination Certificate
active
06175824
ABSTRACT:
BACKGROUND OF THE INVENTION
1. Field of the Invention
The present invention relates to a financial data processing system and method for selecting an investment portfolio of companies with substantial price appreciation potential, based on a newly discovered association between stock price appreciation and the technological strengths of the companies, where technological strength is measured through indicators derived from the companies' patent portfolios. More particularly, the systems and methods of the present invention rank companies by a technology score derived from an analysis of at least the number and growth rates of company patents, citations to company patents from later patents, the references from company patents to earlier patents and research papers, and historical stock price appreciation. Because these technology strength indicators have not heretofore been available to investors, they allow technologically undervalued and technologically overvalued companies to be identified, and allow investors to assemble a portfolio of technologically undervalued stocks which should substantially “beat the market”, and to avoid investing in companies which are technologically overvalued in the market.
2. Prior Art
In the last decade of the 20
th
Century it has become widely accepted that invention and innovation are fundamental forces driving the U.S. high-technology economy, and that much of the growth in the Western Economies can be traced to the close links between the growth of scientific knowledge and the use of technology. (See N. Rosenberg, and L. E., Birdzell, Jr. “Science, Technology and the Western Miracle.”
Scientific American
263 (5) [1990] 42-54.) While this has been clearly perceived at the national policy level and in the aggregate by the general rise of technology stocks, direct linkage of company technology and stock price has remained elusive. In particular, although empirical research has established that corporate patenting is associated with subsequent gains in firms' productivity (see Zvi Griliches, “Patent Statistics as Economic Indicators: A Survey.”
Journal of Economic Literature
28 [1990] 1661-1707), this general relationship has not yet been applied to stock portfolio selection, although contemporary research indicates that this is likely to be successful. (See Zhen Deng, Baruch Lev and Francis Narin. “Science & Technology as Predictors of Stock Performance.”
Financial Analysts Journal,
55 [May/June 1999] 20-33), and Francis Narin, Elliot Noma, and Ross Perry, “Patents as Indicators of Corporate Technological Strength.”
Research Policy,
16, [1987] 143-155).
Part of the reason that stock pricing models have not focused on technology is that public information about firms' R&D activities is inadequate for the purpose of investment analysis. The firm's periodic R&D expenditures, the sole innovation-related item required to be disclosed in financial statements, is too coarse an indicator of the nature, quality and expected benefits of its science and technology. Firms generally do not disclose information about the nature of their science and technology, nor can investors glean from R&D cost data the substantial differences that exist across firms in innovative capabilities. Furthermore, various innnovative activities, particularly in small companies, are not formally classified as R&D, and hence are not reported separately to investors. Consequently, publicly available information on firms' science and technology is inadequate for assessing the capabilities of firms to innovate and the impact of such innovations on future corporate performance. Patent citation analysis provides a potentially important tool for overcoming many of these data inadequacy problems.
The extensive documentation accompanying patent applications includes a wealth of information from which various aspects of the quality of firms' science and technology can be learned. Of particular relevance are the references cited in the patent documents which identify earlier inventions (“prior art”), in the form of previous patents or scientific papers and articles relevant to the extant patent application.
Economists have in recent years examined the usefulness of patent citations as output measures of firms' innovative activities, supplementing R&D expenditures, which are an input measure. For example, it has been shown that the intensity of citations to a set of patents in subsequent patents was related to the social gains from the examined patents. (See Manual Trajtenberg. “A Penny for your Quotes: Patent Citations and the Value of Innovations,”
Rand Journal of Economics
21, [1990] 172-187). Other research has shown that patents highly ranked by industry staff were more frequently cited than patents of lower rank, (see Michael B. Albert, Daniel Avery, Paul McAllister, and Francis Narin. “Direct Validation of Citation Counts as Indicators of Industrially Important Patents,”
Research Policy,
20 [1991] 251-259) and that the intensity of citations to firms' patents is associated with their market values. (See Bronwyn H. Hall, Adam Jaffe, and Manuel Trajtenberg. “Market Value and Patent Citations: A First Look.” Paper prepared for the Conference on Intangibles and Capital Markets, New York University, [1998]). Recent work also shows that patent renewal and citation frequency are correlated (see Patrick Thomas. “The Effect of Technological Impact Upon Patent Renewal Decisions,”
Technology Analysis & Strategic Management, II,
2, [1999] 181-197) while an early paper showed that patents associated with important inventions were twice as highly cited as control patents. (See Mark P. Carpenter, Francis Narin and Patricia Woolf. “Citation Rates to Technologically Important Patents,”
World Patent Information
4, [1981], 160-163). Finally, pioneering patents were found to be cited 5 times as frequently as ordinary patents. (See Anthony Breitzman and Francis Narin. “A Case for Patent Citation Analysis in Litigation,”
Law Works,
3, 3, [March 1996] 10-11, 25-26). Prior evidence thus substantiates patent citations as valid indicators of firms' science and technology.
The fundamental idea underlying the economic analysis of patent citations is that a large number of citations to an earlier patent from later patents indicates that the earlier patent is an important invention, one that has led to numerous subsequent technological improvements. It follows, that a company whose patent portfolio contains a large number of highly cited patents is one that is generating innovative technology, likely to yield important inventions and successful products. Thus, one would expect that companies whose patents are highly cited would tend to be more successful innovators and perform better in both the real and capital markets than companies whose patents are less frequently cited.
Other attributes of patent citations may indicate additional aspects of the quality of firms' science and technology. One such attribute is the “Science Linkage” of a company's patents, which indicates the number of references in the firm's own patent applications to scientific papers, as distinct from references to previous patents. (See Francis Narin, Kimberly S. Hamilton and Dominic Olivastro. “The Increasing Linkage between U.S. Technology and Public Science,”
Research Policy,
26.3, [1997] 317-330). Science Linkage thus indicates how close to science, or to basic research the fins R&D activities are. Science Linkage is very industry dependent: close to zero in mechanical technologies and up to 15 or more in advanced biotechnologies.
In general, companies that are innovating rapidly should be more successful in product development and marketing than firms relying on old technologies. This leads to another citation indicator, “Technology Cycle Time,” which measures the median age of the U.S. patents cited in the firm's patents. A tendency to cite
Breitzman Anthony F.
Narin Francis
Akin Gump Strauss Hauer & Feld L.L.P.
CHI Research Inc.
Patel Jagdish N
Swann Tod R.
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