Working Paper: NBER ID: w7201
Authors: Michael R. Darby; Qiao Liu; Lynne G. Zucker
Abstract: High-tech firms are built much more on the intellectual capital of key personnel than on physical assets, and firms built around the best scientists are most likely to be successful in commercializing breakthrough technologies. As a result, such firms are expected to have higher market values than similar firms less well endowed. In this paper we develop and implement an option-pricing based technique for valuing these and similar intangible assets by examining the effect of ties to star scientists on the market value of new biotech firms. Since firms with more star ties are likely to have a greater probability per unit time of making a commercially valurable R&D breakthrough, we argue and confirm empirically that both the value of the firm and the likelihood of jumps in the value are increasing in the number of star ties. These effects can be financially as well as statistically significant: for two firms with mean values for other variables, the predicted increase in market value of a firm with one article written by a star as or with a firm employee is 7.3% or 16 million 1984 dollars compared to a firm with no articles.
Keywords: Intellectual Human Capital; High-Tech Firms; Market Valuation; Star Scientists; Biotechnology
JEL Codes: O31; G12; M40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| intellectual human capital (J24) | technological breakthroughs (O33) |
| technological breakthroughs (O33) | investors' valuations of the firm's assets (G32) |
| ties to star scientists (A14) | market value (D46) |
| intellectual human capital (J24) | likelihood of jumps in market value (G17) |
| intellectual human capital (J24) | market valuation (G10) |
| star scientists (B31) | successful commercialization of breakthrough technologies (O36) |