Patent Issuances and Stock Volatility

Abstract

How do patents affect firm risk? In recent years, the US patent system has experienced a large expansion, granting more patents than ever before. Exploiting the heterogeneity of this expansion between patent classes, this paper asks how the patent system is changing individual firm’s stock volatility. Introducing a novel shift-share instrument based on patent applications across industry sectors, I document how patent issuances were volatility increasing before 2000 but volatility reducing since then. This stock volatility reduction effect is concentrated among firms in highly competitive sectors, giving evidence that patents have been used more defensively against competition since 2000 rather than as growth options.

Keywords: Patenting; Firm risk; Real options; Shift-share instrument

Australian Academy of Accounting and , volume 6, issue 1, January 2024, pp 82-97