No Need to be Granted? Patent Applications, Signaling, and Valuation Events

Abstract

Most existing studies suggest patent applications as quality signals, but only investigate granted applications with the assumption that patent applications are rarely rejected. However, recent findings show that a large portion of patent applications filed at the U.S. patent office have been denied. This paper aims to understand why some applications are less likely to be granted from the perspective of strategic signaling. Since new technologies are hard to precisely assess, I propose that firms with new technologies may strategically file applications to increase their firm value for impending valuation events. Therefore, those patent applications are less likely to be granted. Further, the effect becomes weaker for firms with more investors’ information acquisition or more granted patent stock. Using a large sample of U.S. patent applications and a novel text-based measure of new technologies, I find supporting evidence for my hypotheses. I further conduct a series of supplementary analyses, including the propensity score matching approach and an instrumental variable analysis based on natural experiments, to obtain causal evidence. I contribute to the innovation literature and signaling theory by considering the motivation and self-selection in patent filings.