Defendant Cash Holdings in Patent Litigation: The Impact on Shareholder Value

64 Pages Posted: 3 Oct 2014 Last revised: 26 Sep 2015

See all articles by David Tan

David Tan

University of Washington

Jie Yang

Board of Governors of the Federal Reserve System

Date Written: September 26, 2015

Abstract

We explore the importance of cash for shaping rivalry outside the product domain by studying its implications for firms defending against patent litigation by rivals. War chests of cash can make firms more formidable targets, reducing rivals' expected gains from litigation. However, cash holdings have agency costs and carry the risk of allowing value-destroying litigation spending. We find that while defendant cash holdings reduce plaintiffs' abnormal returns from litigation, they also reduce defendants' own abnormal returns and result in greater joint loss of shareholder value for both sides. In addition, we find that defendant cash holdings are associated with cases progressing to later and more expensive stages of litigation.

Keywords: Patent litigation, shareholder value, rivalry, cash holdings, agency cost, financial constraint

JEL Classification: G30, G32, O34

Suggested Citation

Tan, David and Yang, Jie, Defendant Cash Holdings in Patent Litigation: The Impact on Shareholder Value (September 26, 2015). Georgetown McDonough School of Business Research Paper No. 2504156, Available at SSRN: https://ssrn.com/abstract=2504156 or http://dx.doi.org/10.2139/ssrn.2504156

David Tan

University of Washington ( email )

Box 353226
Seattle, WA 98195-3200
United States

Jie Yang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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