THAT SHOULDN’T’VE BEEN PATENTABLE! – INVESTIGATING MARKET REACTION TO PATENT INVALIDATION IN THE U.S.

Abstract

Kogan et al. (2017) showed that patents are sufficiently valuable that the grant of a patent increases the stock market value of the firm receiving the patent. However, a small fraction of patents are challenged and after litigation in courts, invalidated. Here, I cross-check the findings of Kogan et al. (2017) using an antithetical approach by examining the stock market reaction to invalidation. Compiling opinions of U.S. Federal Courts, I constructed a novel dataset of patents that were invalidated on appeal during the period of 2000-2016. Event studies were conducted on three different scenarios – (1) invalidation by district courts, (2) appellate court’s affirmation of the district courts’ invalidation, and (3) appellate court’s reversal of the district courts’ judgement that the patent was not invalid. In all three scenarios, the court decisions were associated with negative cumulative abnormal returns (CAR). These results lend credence to the finding of Kogan et al. (2017) that patents are sufficiently valuable to increase the stock market value of the recipient.