Intellectual property rights protection and the value of corporate cash evidence from anti-troll laws

Abstract

The growing problem of "patent trolling" by non-practicing entities (NPEs) has recently received substantial attention and led to ongoing debates in academia. I examine whether and how anti-troll laws preventing frivolous patent infringement claims from NPEs affect shareholder valuation of corporate cash assets in high-tech industries. My difference-in­differences identification strategy exploits the staggered adoption of anti-troll laws in 34 states as a quasi-natural experiment. I find that the marginal value of cash increases by $0.35 for high-tech firms after the passage of anti-troll laws. I perform multiple identification and robustness tests to ensure the validity of this baseline finding. Moreover, I document considerable heterogeneity of the main finding in the variation of multiple firm characteristics. Cross-sectional tests further reveal that this valuation effect varies depending on firms' growth opportunities, cash needs, access to external financing, and financial condition. Furthermore, anti-troll laws also have real effects in shaping the corporate liquidity policy and encouraging companies to reserve cash resources for precautionary motives. Finally, I find that anti-troll laws are effective in promoting corporate innovation outputs. Specifically, I show that anti-troll laws lead to a higher level of R&D expenses, more number of corporate patent applications, better quality of patents (as measured by patent citations), and a higher market value of patents. Overall, this study highlights that anti-troll laws better protect corporate intellectual property rights, enabling high-tech firms to better exploit cash resources to fund value-increasing R&D investments for upcoming innovation competition. Consequently, shareholders revise their valuation of corporate cash according to their updated assessment of corporate internal financial flexibility.