Profit Windfalls and Investments in Innovation: Evidence from Patent Term Extensions

65 Pages Posted: 15 Jun 2016 Last revised: 15 Jan 2017

Shenje Hshieh

City University of Hong Kong; University of California, Los Angeles (UCLA), Students

Date Written: January 14, 2017

Abstract

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

Hshieh, Shenje, Profit Windfalls and Investments in Innovation: Evidence from Patent Term Extensions (January 14, 2017). Available at SSRN: https://ssrn.com/abstract=2794175 or http://dx.doi.org/10.2139/ssrn.2794175

Shenje Hshieh (Contact Author)

City University of Hong Kong ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

University of California, Los Angeles (UCLA), Students ( email )

Los Angeles, CA
United States

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