Review of Finance Vol. 25 No. 3 2021

Intellectual Property Protection and Financial Markets: Patenting versus Secrecy

Nishant Dass¹; Vikram K. Nanda²; Haemin Dennis Park²; Steven Chong Xiao²

¹ Claremont McKenna College · ² Naveen Jindal School of Management, University of Texas at Dallas

Abstract

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.

DOI

10.1093/rof/rfaa033

Volume

25

Issue

3

Pages

669-711

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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