An Examination of Options Embedded in a Firm's Patents: The Value of Dispersion in Citations

This paper applies and empirically tests a real options approach to conceptualizing the value of patents. Based on a theorem derived by Merton (1973), we propose that greater dispersion in the citations of a firm's patents represents greater flexibility for the firm to exercise the option rights embedded in the patents and thus enhances the option value of the patents. A test of this proposition using a sample of 128 US-based biotechnology firms found corroborative results.