So Sue Me! The Cross Section of Stock Returns Related to Patent Infringement Allegations
45 Pages Posted: 21 Dec 2017 Last revised: 16 Dec 2022
Date Written: November 21, 2022
Abstract
Using patent lawsuit data from 2000 to 2014, we find that a stock portfolio consisting of alleged patent infringers (i.e., firms sued for patent infringement) provides significantly higher stock returns (between 0.48% to 0.61% per month) in the following year compared to other firms with similar characteristics. In contrast, plaintiff firms’ subsequent stock returns are not significantly different from comparable firms’ returns. We examine several possible explanations for this pattern, including pessimism-driven mispricing, exposure to unknown systematic risk, cash holdings, and financial constraints. Our evidence supports the explanation based on pessimism-driven mispricing.
Keywords: Patent litigation; stock returns; mispricing; pessimism; return predictability
JEL Classification: G12, G14, O34
Suggested Citation: Suggested Citation