Patent Ownership Fragmentation and Market Value: An Empirical Analysis

Abstract

A higher fragmentation of patent ownership following the recent U.S. pro-patent shifts has built overlapping property rights or patent thickets for firms with cumulative innovations. This has made the use of other firms' innovations costlier, due to higher transaction costs, licensing fees, and the possibility of hold-up. Using a panel data on 2,441 publicly traded U.S. manufacturing firms from 1976 to 2002, I quantify costs of the fragmentation and find that patent thickets lower firms' expected profit and, consequently, their stock market valuation. I also find that firms with a large patent portfolio size experience a smaller effect, likely because stronger bargaining position lowers the occurrence of the hold-up problem for these firms. In addition, there is no systematic time effect from patent thickets on firms' market value with a large patent portfolio size.