Paper short abstract:

This paper examines the extent to which corporate innovations in Japan contribute to firms' market value. It is based on the data of 600 companies from 2005 to 2016 in pharmaceutical, chemical, machinery and electric industries. It operationalizes innovation as R&D spending, patents and citations.

Paper long abstract:

This paper examines the extent to which corporate innovations in Japan contribute to firms' market value. It is based on the data of 600 companies from 2005 to 2016 in pharmaceutical, chemical, machinery and electric industries. The research operationalizes innovative capacities as research and development (R&D) expenditures as well as stocks of patents and citations. The market value of companies is expressed as Tobin's q (market to book ratio).

Although the rich record of related studies dates to the mid-1980s, the Japanese case has not received enough coverage. It matters for the following reasons. Firstly, Japan has a third-largest stock market in the world measured as the market capitalization of listed domestic companies. Secondly, alongside with the growing market for corporate control, Japan has distinct institutional arrangements encapsulated by the pertaining legacy of relational corporate finance and governance. Hence, it presents a rich material for scholars focusing on interaction between markets and institutions.

In line with the existing studies, this paper corroborates that the Tokyo Stock Exchange (TSE) welcomes higher R&D spending, measured both as a stock and as an intensity. On the other hand, it appears that in this institutional setting, market does not react to the mere surge in patents' and citations' stock relative to assets. In turn, Tobin's q is evidently sensitive to measures emphasizing the quality of innovation such as "citations per patent" and "patents per dollar spent on R&D". In addition, current study has found out that the TSE consistently rewards pharmaceutical firms with higher export ratios. This can be explained by the strategic shift in the late 1990s, when many drug companies felt competitive pressure to internationalize, which placed them under a greater market scrutiny.