Participation in setting technology standards and the implied cost of equity

Xin Deng; Qian Cher Li; Simona Mateut

doi:10.1016/j.respol.2022.104497

Participation in setting technology standards and the implied cost of equity

Xin Deng
, Qian Cher Li^*
, Simona Mateut

^*Corresponding author for this work

Manchester Business School
University of Nottingham

Research output: Contribution to journal › Article › peer-review

14 Citations (SciVal)

Abstract

This study empirically investigates the financial market's reaction to firms’ participation in standard setting organizations (SSOs) in terms of firms’ implied cost of equity capital – the discount rate applied by investors to a firm's expected future cash flows. Our analysis utilizes a panel of 3350 US public firms and their membership of 183 SSOs operating in a range of technology domains between 1996 and 2014. It shows a significantly lower cost of equity for SSO participants. We then empirically document a causal link between SSO membership and a firm's cost of equity, by exploiting exogenous variations in membership count linked to SSO closures and an instrumental variable measuring SSO availability. Our results underscore the important role of SSO membership in mitigating the perceived riskiness of a firm, particularly when it faces high degrees of technological uncertainty, product-market uncertainty, and information asymmetry.

Original language	English
Article number	104497
Journal	Research policy
Volume	51
Issue number	5
Early online date	4 Mar 2022
DOIs	https://doi.org/10.1016/j.respol.2022.104497
Publication status	Published - Jun 2022

Bibliographical note

Cher Li is grateful for the support by the Economic and Social Research Council [ESRC grant ref. ES/T001771/1].

Funding

We would like to thank Shamim Ahmed, Kevin Amess, Geert Boedt, Thanaset Chevapatrakul, Renaud Foucart, Joachim Henkel, Lina Song, Mo Tian, Piercarlo Zanchettin, the editor Alex Coad, associate editor Aija Leiponen, and two anonymous referees for their helpful comments which have greatly improved this research. We are also grateful for feedback received from participants at the 2021 European Policy for Intellectual Property Conference, the 2021 Congress of the European Accounting Association, the 2021 ESCoE Conference on Economic Measurement, the 2020 Summer School on Data and Algorithms for Science, Technology & Innovation Studies, and seminar audience at Nottingham University Business School in 2019. Cher Li is grateful for the support by the Economic and Social Research Council [ESRC grant ref. ES/T001771/1]. We would like to thank Shamim Ahmed, Kevin Amess, Geert Boedt, Thanaset Chevapatrakul, Renaud Foucart, Joachim Henkel, Lina Song, Mo Tian, Piercarlo Zanchettin, the editor Alex Coad, associate editor Aija Leiponen, and two anonymous referees for their helpful comments which have greatly improved this research. We are also grateful for feedback received from participants at the 2021 European Policy for Intellectual Property Conference, the 2021 Congress of the European Accounting Association, the 2021 ESCoE Conference on Economic Measurement, the 2020 Summer School on Data and Algorithms for Science, Technology & Innovation Studies, and seminar audience at Nottingham University Business School in 2019. Cher Li is grateful for the support by the Economic and Social Research Council [ESRC grant ref. ES/T001771/1].

Keywords

Cost of equity
Standard setting organizations (SSOs)
Technology standards
Uncertainty

Access to Document

10.1016/j.respol.2022.104497Licence: CC BY-NC-ND 4.0

Cite this

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title = "Participation in setting technology standards and the implied cost of equity",

abstract = "This study empirically investigates the financial market's reaction to firms{\textquoteright} participation in standard setting organizations (SSOs) in terms of firms{\textquoteright} implied cost of equity capital – the discount rate applied by investors to a firm's expected future cash flows. Our analysis utilizes a panel of 3350 US public firms and their membership of 183 SSOs operating in a range of technology domains between 1996 and 2014. It shows a significantly lower cost of equity for SSO participants. We then empirically document a causal link between SSO membership and a firm's cost of equity, by exploiting exogenous variations in membership count linked to SSO closures and an instrumental variable measuring SSO availability. Our results underscore the important role of SSO membership in mitigating the perceived riskiness of a firm, particularly when it faces high degrees of technological uncertainty, product-market uncertainty, and information asymmetry.",

keywords = "Cost of equity, Standard setting organizations (SSOs), Technology standards, Uncertainty",

author = "Xin Deng and Li, \{Qian Cher\} and Simona Mateut",

note = "Cher Li is grateful for the support by the Economic and Social Research Council [ESRC grant ref. ES/T001771/1].",

year = "2022",

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doi = "10.1016/j.respol.2022.104497",

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AU - Deng, Xin

AU - Li, Qian Cher

AU - Mateut, Simona

N1 - Cher Li is grateful for the support by the Economic and Social Research Council [ESRC grant ref. ES/T001771/1].

PY - 2022/6

Y1 - 2022/6

N2 - This study empirically investigates the financial market's reaction to firms’ participation in standard setting organizations (SSOs) in terms of firms’ implied cost of equity capital – the discount rate applied by investors to a firm's expected future cash flows. Our analysis utilizes a panel of 3350 US public firms and their membership of 183 SSOs operating in a range of technology domains between 1996 and 2014. It shows a significantly lower cost of equity for SSO participants. We then empirically document a causal link between SSO membership and a firm's cost of equity, by exploiting exogenous variations in membership count linked to SSO closures and an instrumental variable measuring SSO availability. Our results underscore the important role of SSO membership in mitigating the perceived riskiness of a firm, particularly when it faces high degrees of technological uncertainty, product-market uncertainty, and information asymmetry.

AB - This study empirically investigates the financial market's reaction to firms’ participation in standard setting organizations (SSOs) in terms of firms’ implied cost of equity capital – the discount rate applied by investors to a firm's expected future cash flows. Our analysis utilizes a panel of 3350 US public firms and their membership of 183 SSOs operating in a range of technology domains between 1996 and 2014. It shows a significantly lower cost of equity for SSO participants. We then empirically document a causal link between SSO membership and a firm's cost of equity, by exploiting exogenous variations in membership count linked to SSO closures and an instrumental variable measuring SSO availability. Our results underscore the important role of SSO membership in mitigating the perceived riskiness of a firm, particularly when it faces high degrees of technological uncertainty, product-market uncertainty, and information asymmetry.

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KW - Uncertainty

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Participation in setting technology standards and the implied cost of equity

Abstract

Bibliographical note

Funding

Keywords

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