We review the effectiveness of various adjustment methods in correcting the truncation-bias in patents data and the implications for existing studies. The NBER patents-database was recently updated, extending the sample from 2006 to 2010. The updated sample is largely free of truncation-bias over the period covered by the NBER-2006 sample, allowing us to evaluate the bias-adjustment methods. We find that existing adjustments perform poorly towards the end of NBER-2006 sample. We re-examine multiple studies from the recent literature on innovation and show that findings based on the last few years of NBER-2006 data are not supported in the updated patents-database.

Firms rely on patenting and trade secrecy to protect their intellectual property. We study how changes in the trade-off between patenting and secrecy affect firms’ stock liquidity and financing outcomes. We show that an international trade agreement (TRIPS) that strengthened patent protection led to a 10.2% increase in patenting, accompanied by a 14.0%–27.1% improvement in stock liquidity for firms in patent-reliant industries. This in turn allows the affected firms to increase equity financing by 1.9% and reduce leverage by 5.9%. Our results suggest that policies that promote use of patenting over secrecy can reduce informational frictions in equity markets.

We analyze the role of “directors from related industries” (DRIs) on a firm's board. DRIs are officers and/or directors of companies in the upstream/downstream industries of the firm. DRIs are more likely when the information gap vis-à-vis related industries is more severe or the firm has greater market power. DRIs have a significant impact on firm value/performance, especially when information problems are worse. Furthermore, DRIs help firms handle industry shocks and shorten their cash conversion cycles. Overall, our evidence suggests that firms choose DRIs when the adverse effects due to conflicts of interest are dominated by the benefits due to DRIs' information and expertise.