Patent Quality and Firm Value: Evidence from Patent Examiners Busyness
60 Pages Posted: 11 Mar 2018 Last revised: 29 Oct 2020
Date Written: August 25, 2020
We study the causal effect of patent quality on firm value in a unique setting of patent examiner busyness which can negatively affect patent quality. This setting mitigates endogeneity concerns as patent examiner busyness is unlikely related to firm fundamentals. We first document that patents allowed by busy examiners tend to have lower quality as they are associated with lower probabilities of future litigation, higher probabilities of being invalidated conditional on litigation, lower future citations, and lower operating performance of filing firms. Further, examiner busyness of firms’ patents significantly negatively predicts firms’ future stock returns, which is consistent with investor underreaction to examiner busyness. The return predictability of examiner busyness increases in firms’ innovation intensity, product market threats, and limited investor attention to patent issuance. The abnormal returns associated with examiner busyness do not experience a long-term reversal. These results together provide strong evidence that patent quality has a substantial casual effect on firm value.
Keywords: patent quality, patent examiners, examiner busyness, firm value, stock returns, innovation, USPTO, investor underreaction.
JEL Classification: G14, G32, G41, O31
Suggested Citation: Suggested Citation