Profit Windfalls and Investments in Innovation: Evidence from Patent Term Extensions
65 Pages Posted: 15 Jun 2016 Last revised: 15 Jan 2017
Date Written: January 14, 2017
I show that mature patent-practicing firms respond to windfall profits derived from exogenously extended patent protection time by engaging in external patent acquisitions that diversify their patent portfolios into new technologies. By exploiting the random timing of patent term expiry dates and their unexpected extensions due to the Uruguay Round Agreements Act, I find that a one standard deviation increase in the citation-weighted patent portfolio share of term-extended patents leads to an increase in cash flow by 1.5 percent of book assets. Given these windfall profits, I find evidence of physical capital investment, debt issuance reduction, and acquisitions of new external technologies. Internal investments in R&D, on the other hand, show no response, suggesting high R&D adjustment costs for large, mature firms.
Keywords: Investments, R&D, financial constraints, innovation, patents, patent cliff
JEL Classification: G30, G38, O32, M12
Suggested Citation: Suggested Citation