Smoke signal: When firms' patent strategy and local patent protection system affect equity stakes in cross-border acquisitions

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A distinctive feature of many international acquisitions of firms with technology resources is the extreme uncertainty about the value of the target's resources. Such uncertainty increases the complexity of ownership decisions in target firms. Drawing from signaling theory, we articulate how international acquirers perceive the pre-emptive power of target firms' patent portfolio as a positive signal, increasing their confidence in target firms' technology and leading them to seek a higher level of equity. We further argue that the strength of the target firm's home country's patent system also acts as a positive signal that encourages investors to acquire a higher level of equity in cross-border acquisitions. However, it also weakens then impact of the pre-emptive power signal. Our findings have implications for scholars, policymakers, and managers.