Patent Litigation and Cost of Capital

31 Pages Posted: 13 Jul 2012

See all articles by David Tan

David Tan

University of Washington

Jie Yang

Board of Governors of the Federal Reserve System

Date Written: July 01, 2012

Abstract

Involvement in patent litigation creates substantial direct and indirect costs for firms. We present evidence that pairs of firms involved in patent litigation are more evenly-matched in financial profiles than pairs of firms not involved in litigation. We take advantage of a novel, hand-collected data set that combines data on observed instances of patent litigation with product-level data to form dyadic plaintiffs-defendant pairs at risk of litigation in the semiconductor industry from 1984 to 2000. Product-level data for more than 200,000 semiconductor devices coupled with firm patent data allows us to construct fine-grained controls for risk of litigation between pairs of potential litigants. We consider several variables associated with a firm’s cost of capital: 1) the Whited and Wu (2006) index for financing constraints, 2) analyst coverage, and 3) institutional ownership concentration. We find evidence that, controlling for technological and product overlap, pairs of firms involved in litigation are more similar in terms of financing constraint, analyst coverage, and institutional ownership concentration than pairs of firms not involved in litigation.

Keywords: patent litigation, cost of capital

JEL Classification: G32, O34

Suggested Citation

Tan, David and Yang, Jie, Patent Litigation and Cost of Capital (July 01, 2012). Available at SSRN: https://ssrn.com/abstract=2104430 or http://dx.doi.org/10.2139/ssrn.2104430

David Tan (Contact Author)

University of Washington ( email )

Box 353226
Seattle, WA 98195-3200
United States

Jie Yang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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