Flow Signals: Evidence from Patent and Alliance Portfolios in the US Biopharmaceutical Industry

Abstract

Integrating signaling theory and the portfolio diversity literature, we theorize that diversity in a firm's patent and alliance portfolios sends contrasting flow signals impacting its market value in a nuanced way. Diversity in an alliance portfolio mediates the patent portfolio diversity -market value relationship by suppressing the negative effect of patent portfolio diversity creating an overall positive effect. We test our mediation model on a longitudinal set of 225 U.S. biopharmaceutical firms that were awarded 17,078 patents and participated in 37,744 alliances between 1990 and 2006. Our theory and findings contribute three novel insights. First, we demonstrate the value of a temporal lens in explaining why diversity in a firm's patent and alliance portfolios send flow signals that establish expectations among market observers and have performance implications. Second, establishing that patent and alliance portfolio diversity are temporally sequenced provides compelling evidence for the value of studying multiple types of portfolios, their temporal relationships and effects on firm outcomes. Third, since diversity in a firm's portfolios can send contrasting flow signals conditioned on the cognitive demands and proximity involved in interpreting the signals, firms that do not maintain a 'signaling fit' with market observers increase the probability of unintentional negative signaling effects.

The Impact of Industry–University–Research Alliance Portfolio Diversity on Firm Innovation: Evidence from Chinese Manufacturing Firms

“…Since I-U-R alliances typically often last for 5 years and termination dates are rarely reported, we follow previous research in applying a 5-year window to construct a focal firm's I-U-R alliance portfolio [20,50]. For example, the I-U-R alliance portfolio of year t is computed as the collection of I-U-R alliances established from the year t-5 to the year t-1.…”

Alliance Portfolio Diversity and Innovation: The Interplay of Portfolio Coordination Capability and Proactive Partner Selection Capability

“…For example, in our case, it might be possible that as soon as firms have more patents, they are more attractive as alliance partners. Prior research suggests that in technology‐intensive industries, such as biotechnology, a new patent is not only a revenue‐generating invention but also a signal of the firm's underlying technological capabilities, important for potential future alliance partners (Caner et al, ; Stuart et al, ). To address this issues, we used the information from our secondary longitudinal dataset on the complete population of German biotech firms from 1996 until 2012 (see Oehme and Bort () for details).…”

“…Finally, the dependent variable firm innovation is based on a three‐year window from 2014 to 2016. In doing so, we made sure that we control the fact that the innovation performance of a firm can also serve as a signal for the attractiveness of the firm as potential alliance partner which increases the chance to find and form new partnerships (e.g., Stuart, ; Caner et al, ; Stuart et al, ).…”

“…Accordingly, prior research has examined the various performance outcomes related to a focal firm’s alliance portfolio diversity (APD), commonly defined as the degree of variance in alliance partners’ resources, capabilities, and knowledge (Jiang et al, ). In addition to financial advantages (Baum et al, ), market value (Caner et al, ), and organizational growth (De Leeuw et al, ; Powell et al, ), APD fosters innovation performance (Hagedoorn et al, ; Wuyts et al, ). The impact of APD on innovation seems especially relevant for high‐technology firms, such as those in the semiconductor (Stuart, ), automotive (Jiang et al, ), and biotechnology industries (George et al, ), in which a set of diverse partners allows firms to compensate for their own lack of resources and to keep pace with technological development.…”

Towards a Democratic New Normal? Investor Reactions to Interim‐Regime Dominance during Violent Events

“…Second, even if the information is accurate, it is not always perfectly correlated with the unobserved construct it is supposed to capture (Busenitz et al, 2005;Connelly et al, 2011). Nonetheless, in the absence of more reliable insights, signals are useful cues that shed at least some light on matters that investors find hard to gauge otherwise (Caner et al, 2018;Schepker et al, 2018). Investors have for instance been shown to use managers' compensation structures, acquisition experience, and cultural backgrounds as signals of managers' motives for making acquisitions (Haleblian et al, 2009;Schijven and Hitt, 2012).…”