Abstract
The path between the patenting of an innovation and the actual commercialization of a new product or technology can be long and costly with 55 to 67 percent of issued U.S. patents lapsing for failure to pay maintenance fees before the end of their term. Drawing on the reputation literature and signaling theory, this paper empirically tests whether firms increase their use of patents prior to IPO date, and whether these patents are underutilized because they are used primarily to signal innovativeness to investors rather than to capture rents. Using data from the NBER database on 464 patents granted in the drug and medicine industry, results show that there is a significant relationship between an increase in patenting activities and the IPO date of a firm. In addition, as expected, many of these patents expire, reinforcing the notion that these patents serve as IPO signals of reputational advantage.
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