Investor Responses to Licensing Announcements: The Use of Market Power and Learning Logics

Abstract

Among various forms of strategic alliance, technology licensing agreements have attracted significant managerial and scholarly attention. In this paper, we examine the differential abnormal returns derived by a licensor and licensee in the backdrop of whether a focal licensing agreement is horizontal (i.e. between firms in the same industry) or non-horizontal (across different industries). Our analysis shows that although on the whole, investors view licensors more favorably than licensees after the announcement of a licensing agreement, they use two different logics--the first, a market power logic and the second, a learning logic, in evaluating the focal licensor and licensee. In horizontal agreements, licensors are positively evaluated by investors when they pair with licensees that are relatively better than them in terms of prior performance and capital intensity. On the other hand, in non-horizontal agreements, licensees generate greater positive abnormal returns when they signal the possession of greater abilities to learn relative to the licensor.