The Value-Relevance of Nonfinancial Information: The Biotechnology Industry

This study examines whether nonfinancial patent information is useful to investors in assessing and valuing biotech firm’s long-term financial performance. The biotech industry requires large R&D investments with uncertain payoffs. Current accounting practice expenses (rather than capitalizes) R&D expenditures. As a result, financial variables are often negative or excessively depressed. Because accounting assets do not reflect biotech firms’ valuable intangible assets, this study examines whether nonfinancial patent information supplement the information content of financial information in market valuation. Using six patent variables measuring both quantity and quality aspects of patents, I found evidence consistent with the idea that nonfinancial patent information captures the biotech firms’ value not currently formally valued by traditional financial indicators. In addition, patent information is associated with and can be useful in predicting a biotech firm’s long-term financial performance with a two-year lag.