Review of Quantitative Finance and Accounting, 26: 67–84, 2006 c  2006 Springer Science + Business Media, Inc. Manufactured in The Netherlands. Patent Citation, R&D Spillover, and Tobin’s Q: Evidence from Taiwan Semiconductor Industry CHEN-LUNG CHIN Department of Accounting, National Chengchi University, No. 64, Sec 2, Jhihnan Rd., Taipei City, 116, Taiwan E-mail: kim@nccu.edu.tw PICHENG LEE ∗ Department of Accounting, Lubin School of Business, Pace University, New York, NY 10038, USA E-mail: plee@pace.edu HSIN-YI CHI Department of Accounting, National Taichung Institute of Technology, No. 129, Sec. 3, Sanmin Rd., Taichung City, Taiwan E-mail:syjsj6273@mail.ntit.edu.tw ASOKAN ANANDARAJAN School of Management, New Jersey Institute of Technology, Newark, NJ 07102-1982, USA E-mail:anandarajan@adm.njit.edu Abstract. Although prior research has examined the effect of patent citations on Tobin’s Q in a variety of environments, in this study we examine whether the parameters are affected by stage of a company in the value chain. Unlike other national semiconductor firms, Taiwanese semiconductor firms typically specialize in one of the value-added activities, namely, either design or manufacturing or packaging and testing. Our finding is that the effect of patent citation on Tobin’s Q is accentuated when the firm is at the front end of the value chain and diminishes as we proceed to the back end. This finding is novel in the literature. We also find that frequency of patent citations and R&D spillover are positive and significant in relation to Tobin’s Q. In addition, the effect of R&D spillover on Tobin’s Q is more pronounced for firms in the design sector relative to other sectors. Key words: patent citation, R&D spillover, Tobin’s Q JEL Classification: M41, O3 1. Introduction In the accounting literature a widely accepted paradigm proposes that financial-statement information is useful to potential investors. However, researchers have observed that the value relevance of financial statement information has gradually declined 1 . Subsequent research, therefore, examined the value relevance of non-financial information. Most of the research that focuses on non-financial information examines how firm valuation ∗ Corresponding author. Authors are grateful for insightful comments and suggestions from an anonymous reviewer. Picheng Lee also gratefully acknowledges a research grant from Lubin School of Business at Pace University.