The Value of Patent Applications in Valuing Firms

It's an age-old question that we've blogged about here before - what role do patents have on firm value? And is any effect due to signaling or exclusivity? Does the disclosure in the patent have any value? Does anybody read patents?

These are all good questions that are difficult to measure, and so scholars try to use natural experiments or other empirical methods to divine the answer. In a recent draft, Deepak Hegde, Baruch Lev, and Chenqi Zhu (all NYU Stern Business) use the AIPA to provide some useful answers. For those unaware, the AIPA mandated that patent applications be published after 18 months by default, rather than held secretly until patent grant. The AIPA is the law that keeps on giving; there have been several studies that use the "shock" of the AIPA to measure what effect patent publications had on a variety of dependent variables.

So, too, in Patent Disclosure and Price Discovery. A draft is available on SSRN, and the abstract is here:

We focus in this study on the exogenous event of the enactment of American Inventor’s Protection Act of 1999 (AIPA), which disseminates timely, detailed, and credible public information on R&D activities through pre-grant patent disclosures. Exploiting the staggered timing of patent disclosures, we identify a significant improvement in the efficiency of stock price discovery. This improvement is stronger when patent disclosures reveal firms’ successful, new, or technologically valuable inventions. This improvement is more pronounced for firms in high-tech or fast-moving industries, or with a large institutional ownership or analyst coverage. We also find stock liquidity rises and investors’ risk perception of R&D drops after the enactment of AIPA. Our results highlight the importance of timely, detailed, and credible disclosures of R&D activities in alleviating the information problems faced by R&D-intensive firms.

This is a short abstract, so I'll fill in a few details. The authors measure the effect on  intra-period timeliness, a standard measure used to proxy for "price discovery," or how quickly information enters the market and settle the price of a stock. There are a lot of articles on this, but here's one for those interested (paywall, sorry).

In short, the authors look at how quickly price discovery occurred before and after the AIPA, correcting for firm fixed effects and other variables. One of the nice features of their model is that patent applications occurred over a period of years, and so the "shock" of patent publication was not distributed only in one year (which could have been affected by something other than the AIPA that happened in that same year).

They find that price discovery is faster after the AIPA. Interestingly, they also find that the effect is more pronounced in high-tech and fast moving fields -- that is, industries where new R&D information is critically important.

Finally, their results say something about the nature of the patent disclosure itself - the effects come from disclosure of the information, and not necessarily the patent grant. Thus, the signaling effect may really relate to information, and (some) people may well read patents after all.