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

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*This page is referenced in the [[Patent Thicket Literature Review]] *This page is listed on the [[PTLR Core Papers]] page ==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} } ==File(s)== *[[Media:Entezarkheir (2010) - Patent Thickets And Market Value An Empirical Analysis.pdf|Download the PDF]] *[[:Image:Entezarkheir (2010) - Patent Thickets And Market Value An Empirical Analysis.pdf|Repository record]] ==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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