Empirical Tests for Creative Destruction in the Pharmaceutical Industry

We propose an empirical strategy for estimating competition in innovation markets based on a model of creative-destruction. Our method relates equity in a firm to information about patent citation patterns. Two innovations we introduce are using daily abnormal stock returns rather than annual measures of Tobin's q and creating citation patterns related to the area of science a firm patents in as represented by the detailed patent classification system. We find that firm's market value increases when their patent portfolio is cited and when there are citations to an area of science in which they are prominent. We interpret these findings consistent with "important" R&D creating value. Our tests of a patent portfolio being passed over are not consistent with value destruction