Measuring the Value of Patents Where it Matters Most

The ability to measure patent quality is essential to evidence-based innovation strategy and public policy, to contrast costs with benefits. Traditionally, a patent’s quality has been proxied by the number of its forward citations. More recently, Kogan et al. (2017) proposed a more direct (and immediately available) measure of patent quality based on stock-market reactions. In this paper, we show that forward citations and Kogan et al. (2017) measure, while being largely correlated around the median as assumed by prior literature, are only marginally overlapping around the tails of the distribution, i.e. for breakthroughs and for failures. Arguably, these are the most interesting outcomes for organizational scholars. We then theorize regarding the potential origin of this lack of overlap at the extremes of the two distributions, and find evidence consistent with the idea that this divergence is not driven by a misvaluation from the financial market, but rather from the fact that forward citations and market-based measures of patent value proxy for different and complementary dimensions of patent value. Our results present important implications for the literature. Specifically, we show that a firm could rarely develop an innovation that is highly impactful from both an economic and a technological perspective. Managers and public policy makers need to recognize and acknowledge an inherent trade-off between the private and the public benefits of innovation. What improves the chances of reaching an innovation breakthrough in terms of economic value can also hamper the likelihood of reaching highly relevant technological and scientific advancements.