A REAL OPTION PERSPECTIVE ON THE MARKET VALUATION OF A FIRM'S TECHNOLOGICAL COMPETENCE.

Researchers have identified technological competence as a primary determinant of survival and success in the new economic climate. Consistently, a number of authors have hypothesized that a firm?s patent holdings will positively predict measures of a firm?s market value. These studies, however, have produced mixed empirical results. Consistent with this research, we believe that patenting will positively predict a firm?s market performance. However, given the uncertainties inherent in patenting, we suggest that proper analysis of the patenting-market performance relationship requires an alternative conceptual view. Specifically we propose that the relationship between patents and market performance is conditioned by factors which affect the value of a firm?s options. Using a sample of 152 U.S.-based pharmaceutical firms, our empirical tests confirm our predictions.