How do institutional investors respond to patent announcements?

Abstract

Purpose

The purpose of this paper is to examine institutional investor demand for shares of firms that announce patents.

Design/methodology/approach

There are three important dates in the process of obtaining a patent. First, a patent filer requests the right for intellectual property on the application date. Next, the content of a patent becomes publicly available on the publication date, if authorized by the US Patent and Trademark Office. Third, once the patent is validated, it is issued on the grant date. The authors focus on the publication date, as it marks the time when the patent-specific information is disclosed to public. In a regression framework, the authors analyze how institutional investors respond to patent publications.

Findings

The authors document a significant increase in institutional demand for a firm’s shares around patent announcements. Institutional investors react more strongly to patent publications announced by firms that have published frequently in the past. The increase in demand is also greater when the firm’s shareholder base consists of a higher percentage of long-term institutions. Institutional trading around patent announcements is associated with higher levels of stock price informativeness. In addition, firms that announce patents exhibit long-term outperformance relative to a control sample. Overall, the results suggest that institutional trading conveys information about the value of patents.

Originality/value

This study is the first to explore changes in institutional demand around patent publications and to show that such events attract institutional investors and have an impact on shareholder wealth, price informativeness and liquidity.

Citation

Lantushenko, V. and Nelling, E.F. (2018), "How do institutional investors respond to patent announcements?", Managerial Finance, Vol. 44 No. 12, pp. 1446-1465. https://doi.org/10.1108/MF-12-2017-0536