Market Manipulation and Innovation
65 Pages Posted: 21 Mar 2016 Last revised: 7 Apr 2019
Date Written: January 7, 2019
We study the impact of suspected market manipulation, including end-of-day manipulation and insider trading around information leakage events, on patents based on a sample of 9 countries spanning the years 2003-2010. The data indicate that end-of-day dislocation mitigates the number of patents and citations received, due to the associated short-termism of the firm’s orientation, long-term harm to a firm’s equity values, and commensurate reduced incentives for employees to innovate. Unlike prior literature that shows a negative relation between patenting and liquidity in the U.S. in an earlier time period, we observe a robust and significantly positive effect of liquidity on patenting in the U.S. and across the 9 countries in our sample over each of the 8 years studied. The positive effect of liquidity on innovation, however, is mitigated by the harmful presence of end-of-day dislocation. The data also confirm the importance of country-level factors such as intellectual property rights across countries that encourage patenting. Our findings are robust to numerous robustness checks on subsamples of the data, propensity score matching analyses, difference-in-differences tests for firms with and without dislocation, among other things.
Keywords: Market Manipulation; Financial market misconduct; End-of-Day Dislocation, Insider Trading; Patents; Innovation; Intellectual Property Rights; Law and finance
JEL Classification: G14; G18; O30
Suggested Citation: Suggested Citation