Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy

Finance

Further details

Firms can protect intellectual property (IP) by keeping inventions secret or, alternatively, by obtaining patent protection in conjunction with detailed disclosure. Our hypothesis is that the choice between secrecy and patenting is affected by the relative protection provided, with distinct implications for stock liquidity and equity financing. Stronger trade secrets (patent) protection is expected to encourage firms to rely more (less) on secrecy, increasing (reducing) information asymmetry and stock illiquidity. Our empirical findings are supportive: exogenous, staggered passage of state-level statutes that strengthen trade-secret protection result in fewer patent applications, increased opaqueness and stock illiquidity and worse announcement reaction to seasoned equity offerings (SEOs). By contrast, implementation of Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), that strengthened patent protection, is followed by an increase in patenting, enhanced transparency and stock liquidity and a less negative stock market reaction to SEOs. Small firms, lacking resources and experience with litigation, are particularly affected by changes in IP protection.

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