Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy

49 Pages Posted: 1 Nov 2014 Last revised: 26 Oct 2015

Nishant Dass

Georgia Institute of Technology - Scheller College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management

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Date Written: July 25, 2015

Abstract

Firms can protect intellectual property (IP) either by keeping inventions secret or by patenting the IP, which entails detailed information disclosure. Our hypothesis is that the firm's choice between secrecy and patenting is influenced by the relative protection provided, which then has distinct implications for stock liquidity and equity financing. Stronger IP-protection through trade secrets (patents) is expected to encourage firms to rely more (less) on secrecy, thus increasing (reducing) information asymmetry and stock illiquidity. Our empirical findings are supportive: exogenous, staggered passage of state-level statutes that strengthen trade-secret protection result in: fewer patent applications, increased opaqueness, greater stock illiquidity, and worse announcement reaction to seasoned equity offerings (SEOs). By contrast, implementation of the international Agreement on Trade-Related Aspects of Intellectual Property Rights (a.k.a. TRIPS), that strengthened patent-protection, is followed by an increase in patenting, enhanced transparency, greater stock liquidity, and a less negative stock-market reaction to SEOs.

Keywords: Innovation, patents, trade secrets, TRIPS, liqudity

JEL Classification: G14, G30

Suggested Citation

Dass, Nishant and Nanda, Vikram K. and Xiao, Steven Chong, Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy (July 25, 2015). Available at SSRN: https://ssrn.com/abstract=2517838 or http://dx.doi.org/10.2139/ssrn.2517838

Nishant Dass

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
404-894-5109 (Phone)

HOME PAGE: http://scheller.gatech.edu/dass

Vikram K. Nanda (Contact Author)

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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