Entezarkheir (2010) - Patent Thickets And Market Value An Empirical Analysis

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Reference

  • Entezarkheir, M. (2010), "Patent Thickets and Market Value: An Empirical Analysis", Working Paper
@misc{entezarkheir2010patent,
  title={Patent Thickets and Market Value: An Empirical Analysis},
  author={Entezarkheir, M.},
  year={2010},
  abstract={The pro-patent shift of the United States has created a patent thicket. This has made the use of other firms’ innovations more costly, due to higher transaction costs and the possibility of hold up. Using a panel data on publicly traded US manufacturing firms from 1979 to 1996, this study finds a negative impact from the patent thicket on the market value of the firm. I also find that firms with larger patent portfolios experience a smaller effect, likely because stronger bargaining position lowers the occurrence of the hold-up problem for these firms. The advantage of larger firms is even more prominent following the pro-patent shift. My results also capture heterogeneity in the impact of the patent thicket across industries.},
  discipline={Mgmt},
  research_type={Empirical},
  industry={},
  thicket_stance={},
  thicket_stance_extract={},
  thicket_def={},
  thicket_def_extract={},  
  tags={},
  filename={Entezarkheir (2010) - Patent Thickets And Market Value An Empirical Analysis.pdf}
}

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Abstract

The pro-patent shift of the United States has created a patent thicket. This has made the use of other firms’ innovations more costly, due to higher transaction costs and the possibility of hold up. Using a panel data on publicly traded US manufacturing firms from 1979 to 1996, this study finds a negative impact from the patent thicket on the market value of the firm. I also find that firms with larger patent portfolios experience a smaller effect, likely because stronger bargaining position lowers the occurrence of the hold-up problem for these firms. The advantage of larger firms is even more prominent following the pro-patent shift. My results also capture heterogeneity in the impact of the patent thicket across industries.

Review

Measures of thicket

Following Ziedonis, patent thicket is measured by the fragmentation of patent ownership faced by each firm based on the citations of that firm's patents to patents of other firms.

  • USPTO data identifies patented invention, assignee, citations or references to other patents or non-patented inventions;
  • Fragmentation is measured using a normalized Herfindahl index that gives more weight to firms with firms faced by fragmentation since citation shares are squared.
    • [insert equation 4 HHI] 1 minus the sum of squared shares citations to other firms patents in each firms patent portfolio in each year.

Sample

Size, data source, industries, geography:

  • 1,975 publicly traded US manufacturing firms (SIC=2000-3999) with at least one patent, for 10,273 observations from 1979 to 1996.
  • NBER patent data files are used to construct the thicket index using patents granted between 1963-2002 and citations from 1976 to 2002;
  • Compustat North American Annual Industrial file (with company identifier) is used for company financial information from 1979 to 2002;
  • Observed citations are truncated (citations data is unavailble prior to 1976 and are observed only with a lag), so:
    • data is restricted to 1979 to 1996 period for analysis, and **values are corrected based on distribution of fraction of citations each year since grant date

Results

"...results show that firms experience a significant decline in their market value when the technology market is fragmented. The results also show that the pro-patent shift in the 1980s has increased the size of this impact. I also find that firms with larger patent portfolios experience a smaller negative premium in their market value. This is likely because firms with larger patent portfolios face fewer problems in their cross-licensing negotiations with external entities as the larger portfolio size increases their bargaining power in the licensing negotiations and lowers the risk of being held-up by their rivals. This advantage of firms with larger patent portfolios is even more prominent following the pro-patent shift in the 1980s.
  • Calculating semi-elasticities, market value declines by 1.1% for a 10% increase in the (log) fragmentation index;
  • Analyzing data before and after USPTO change and establishment of CAFC in 1980s (for 1979-1989 and for 1990-1996), market value declines by 0.98% and 1.29% respectively for a 10% increase in the log fragmentation index;
    • Firms with larger portfolios of patents are less impacted, as reflected in a significantly positive interaction term between the fragmentation index and patent portfolio size, although this effect shrinks in the later period.
    • There is a varying negative effect of patent thicket across industries, which is largest and most significant in chemical and mechanical industries.

Social Welfare Consequences

"The pro-patent shift of the United States has created a patent thicket. This has made the use of other firms’ innovations more costly, due to higher transaction costs and the possibility of hold up."

Dependent Variable and Model

  • Tobin's Q, the log of the ratio of the market value of the firm divided by its book value at a point in time. Non-linear least squares equations are estimated that controls for the following:
    • A patent thicket measure which is the logarithm of the Ziedonis fragmentation index [see equation 4 model, pg.6];
    • Market value, which is sum of common and preferred stock, long-term debt adjusted for inflation, and short-term debt;
    • Tangible assets, which is the book value of the firm or net plant and equipment, inventories, investments in unconsolidated subsidiaries and intangibles;
    • Intangible assets, which following Hall's definition is R&D intensity (R&D expenditure/tangible assets), patent intensity (number ot patents per R&D expenditure), citation yield per patent; this stock is depreciated at a rate of 15%.
    • The model also controls for shadow value of firm assets, which is captured with firm, time and random effects in one specification.
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