Cockburn Wagner (2007) - Patents And The Survival Of Internet Related Ipos

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Reference

• Cockburn, I.M. and Wagner, S. (2007), "Patents and the Survival of Internet-related IPOs", Working Paper

@misc{cockburn2007patents,
  title={Patents and the Survival of Internet-related IPOs},
  author={Cockburn, I.M. and Wagner, S.},
  year={2007},
  abstract={We examine the effect of patenting on the survival prospects of 356 internet-related firms that IPO'd at the height of the stock market bubble of the late 1990s. By March 2005, nearly 2/3 of these firms had delisted from the NASDAQ exchange. Although changes in the legal environment in the US in the 1990s made it much easier to obtain patents on software and, ultimately, on business methods, less than half of the firms in this sample obtained, or attempted to obtain, patents. For those that did, we hypothesize that patents conferred competitive advantages that translate into higher probability of survival, though they may also simply be a signal of firm quality. Controlling for age, venture-capital backing, financial characteristics, and stock market conditions, patenting is positively associated with survival. Quite different processes appear to govern exit via acquisition compared to exit via delisting from the exchange due to business failure. Firms that applied for more patents were less likely to be acquired, though obtaining unusually highly cited patents may make them more attractive acquisition target. These findings do not hold for business method patents, which do not appear to confer a survival advantage.},
  discipline={Econ},
  research_type={Empirical},
  industry={Software},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Cockburn Wagner (2007) - Patents And The Survival Of Internet Related Ipos.pdf}
}

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Abstract

We examine the effect of patenting on the survival prospects of 356 internet-related firms that IPO'd at the height of the stock market bubble of the late 1990s. By March 2005, nearly 2/3 of these firms had delisted from the NASDAQ exchange. Although changes in the legal environment in the US in the 1990s made it much easier to obtain patents on software and, ultimately, on business methods, less than half of the firms in this sample obtained, or attempted to obtain, patents. For those that did, we hypothesize that patents conferred competitive advantages that translate into higher probability of survival, though they may also simply be a signal of firm quality. Controlling for age, venture-capital backing, financial characteristics, and stock market conditions, patenting is positively associated with survival. Quite different processes appear to govern exit via acquisition compared to exit via delisting from the exchange due to business failure. Firms that applied for more patents were less likely to be acquired, though obtaining unusually highly cited patents may make them more attractive acquisition target. These findings do not hold for business method patents, which do not appear to confer a survival advantage.

Review

Measures of thicket

Firm-level patenting:

• Number of USPTO patent applications and grants
• Counts of European and Japanese patent applications and grants
• Firm’s average forward citations per patent
• Number of forward citations per claim (counting 7 plus cites).

Thickness of patent families where firm has patented:

• Average USPTO patent family size associated with patents where firms have patents.

Sample

Size, data source, industries, geography:

• 356 internet-based or software firms with IPOs on U.S. NASDAQ stock exchange during “dot com” boom from February 25, 1998 and August 6, 2001.
• Firms selected were categorized by IPO.com as being in (3) industrial segments:
  • Internet Services
  • Internet Software
  • Computer Software.
• Firms tracked an average of 2.4 years until delisted or acquired.

Results

"Our results suggest that the firms that were unable or unwilling to seek patent protection were much less likely to survive the collapse of the dot.com bubble after 2001."

Result magnitude:

• Having filed at least 1 patent application reduces de-listing (increasing survival) by 34%, with another 5% for each additional patent, which is associated with de-listing due to acquisition rather than business failure.
• No significant results for (‘705) business method patents.

Social Welfare Consequences:

• There are private firm benefits from holding more patents, but not business method patents.
• Although tested, no impact on firm survival from quality of patents held, or from thickness of related patent families outside of firm.

Dependent Variable:

• Firm survival as measured by length of listing period (from date of IPO and date of de-listing on NASDAQ due to failure or acquisition).
• Proportional hazard models are used to relate firm survival to patenting measures, controlling for:
  • Age (at IPO since incorporation, assets at IPO date)
  • Industrial classification (NAICS 3)
  • Venture-capital backing
  • Financial characteristics (operating income, sales, and a proxy for cash burn-rate)
  • Stock market conditions (quarterly average NASDAQ Composite Index)