Skip to main content
SpringerLink
Log in

Litigation risks and firms innovation dynamics after the IPO

  • Published:
Journal of Industrial and Business Economics Aims and scope Submit manuscript

Abstract

An initial public offering (IPO) is a critical event in a firm’s life cycle which can reshape its innovation strategy. Research suggests that after going public firms experience an increase in patent productivity. Our paper explores perceived litigation risks as a determinant of this outcome by examining US semiconductor firms. Results show that perceived patent litigation risks are positively associated with patent productivity after the IPO. Interestingly, we also find that the amount of capital raised during the IPO is positively associated with patent productivity after the IPO, successfully replicating previous findings on this relationship. These results are robust to model specifications where we attempt to account for the dynamics of self-selection of firms into IPO by considering matched control firms with similar pre-IPO characteristics, but that never went public.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Resource munificence captures the availability of financial or non-financial resources that may be immediately deployed by the firm (Chang et al. 2018; Dess and Beard 1984; Nohria and Gulati 1996).

  2. Research on market formation has identified aspects of uncertainty including lack of knowledge about technologies and product categories (Grodal et al. 2015; Rindova and Petkova 2007), about dimensions of value within categories (Lee et al. 2018; Rosa et al. 1999), and about industry architectures (Ambos and Birkinshaw 2010a, b; Dattée et al. 2018; Santos and Eisenhardt 2009).

  3. Our observation period begins in January 1996 because IPO prospectuses are available on the SEC Electronic Data Gathering, Analysis, and Retrieval (EDGAR) service only.

  4. Since an IPO represents the most profitable exit route for VC investors (Gompers and Lerner 1999), it becomes in principle a major strategic objective for VC-backed companies. For such reason, we decided to refer to VC-backed companies in order to construct our control group.

  5. We opt for exact matching on relevant covariates rather than propensity score matching (PSM) because recent research shows that coarsened exact matching (CEM) is likely to produce more balanced matched samples than PSM (Iacus et al. 2011, 2012). To provide the strictest test, for each treated firm we find a control firm that matches exactly on the observed covariates.

  6. In their analysis of the innovative behaviour of a sample of US firms going public or being acquired, Aggarwal and Hsu (2014) utilize a 3-year pre-IPO and 3-year post-IPO time window to assess the variation in patent productivity. A similar time window is used by Wies and Moorman (2015) in their comparison of the innovation productivity of a sample of US firms going public with a benchmark of similar private firms. The study by Bernstein (2015) uses a slightly different time window, as it considers patent activity over a period from 3 years before to 5 years after the IPO filing, for a sample of US IPOs.

  7. We deliberately set out to replicate this previous result because it is central for our theorizing on perceived risks of litigation and to respond to the increasing demand for replication in the academic community (Bettis 2012; Bettis et al. 2016; Loken and Gelman 2017).

  8. For instance, in 2002 just a few days before its IPO, PayPal received a patent infringement lawsuit that delayed the company's IPO by a week, raising doubts on the media that it would ever go public. In a similar way, in 2012 Facebook was hit by a legal action over patents moved by Yahoo!, just weeks before its planned initial public offering of stock (Feldman and Frondorf 2015).

References

  • Aggarwal, V. A., & Hsu, D. H. (2014). Entrepreneurial exits and innovation. Management Science, 60(4), 867–887.

    Google Scholar 

  • Ambos, T. C., & Birkinshaw, J. (2010a). How do new ventures evolve? An inductive study of archetype changes in science-based ventures. Organization Science, 21(6), 1125–1140.

    Google Scholar 

  • Ambos, T. C., & Birkinshaw, J. (2010b). How do new ventures evolve? An inductive study of archetype changes in science-based ventures. Organization Science, 21, 1125–1140.

    Google Scholar 

  • Arend, R. J., Patel, P. C., & Park, D. H. (2013). Explaining post-IPO venture performance through a knowledge-based view typology. Strategic Management Journal, 35(3), 376–397.

    Google Scholar 

  • Arundel, A. (2001). The relative effectiveness of patents and secrecy for appropriation. Research Policy, 30(4), 611–624.

    Google Scholar 

  • Bernstein, S. (2015). Does going public affect innovation? Journal of Finance, 70(4), 1365–1403.

    Google Scholar 

  • Bertoni, F., D’Adda, D., & Grilli, L. (2019). Self-selection of entrepreneurial firms in thin venture capital markets: Theory and empirical evidence. Strategic Entrepreneurship Journal, 13(1), 47–74.

    Google Scholar 

  • Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences-in-differences estimates? The Quarterly Journal of Economics, 119, 249–275.

    Google Scholar 

  • Bessen, J., & Meurer, M. J., (2005). The patent litigation explosion. Paper presented at American Law and Economics Association Annual Meetings, 2005.

  • Bessen, J., & Meurer, M. J. (2008). Patent failure: How judges, bureaucrats, and lawyers put innovators at risk. Princeton: Princeton University Press.

    Google Scholar 

  • Bettis, R. A. (2012). The search for asterisks: Compromised statistical tests and flawed theories. Strategic Management Journal, 33(1), 108–113.

    Google Scholar 

  • Bettis, R. A., Helfat, C. E., & Shaver, J. M. (2016). The necessity, logic, and forms of replication. Strategic Management Journal, 37(11), 2193–2203.

    Google Scholar 

  • Blind, K., Edler, J., Frietsch, R., & Schmoch, U. (2006). Motives to patent: Empirical evidence from Germany. Research Policy, 35, 655–672.

    Google Scholar 

  • Brau, J. C., & Fawcett, S. E. (2006). Initial public offerings: An analysis of theory and practice. Journal of Finance, 61, 399–436.

    Google Scholar 

  • Carpenter, R. E., & Petersen, B. C. (2002). Is the growth of small firms constrained by internal finance? Review of Economics and Statistics, 84, 298–309.

    Google Scholar 

  • Carter, R. B., Dark, F. H., & Singh, A. K. (1998). Underwriter reputation, initial returns, and the long-run performance of IPO stocks. Journal of Finance, 53, 285–311.

    Google Scholar 

  • Chang, H. Y., Lee, C. Y., & Wong, Y. J. (2018). The impact of earnings pressure on exploratory innovation. R&D Management, 49(4), 470–483.

    Google Scholar 

  • Cochran, W. G., & Rubin, D. B. (1973). Controlling bias in observational studies: A review. Sankhyā: The Indian Journal of Statistics Series A, 35, 417–446.

    Google Scholar 

  • Cohen, W. M., Nelson, R. R., & Walsh, J. P., (2000). Protecting their intellectual assets: Appropriability conditions and why US manufacturing firms patent (or not). NBER Working Paper no. 7552, 2000.

  • Dattée, B., Alexy, O., & Autio, E. (2018). Maneuvering in poor visibility: How firms play the ecosystem game when uncertainty is high. Academy of Management Journal, 61(2), 466–498.

    Google Scholar 

  • de La Bruslerie, H., & Le Maux, J. (2018). Litigation risk: Measurement and impact on M&A transaction terms. Journal of Business Finance and Accounting, 45(7–8), 952–996.

    Google Scholar 

  • Deeds, D. L., Decarolis, D., & Coombs, J. E. (1997). The impact of firm-specific capabilities on the amount of capital raised in an initial public offering: Evidence from the biotechnology industry. Journal of Business Venturing, 12, 31–46.

    Google Scholar 

  • Demers, E., & Joos, P. (2007). IPO failure risk. Journal of Accounting Research, 45, 333–371.

    Google Scholar 

  • Dess, G. G., & Beard, D. W. (1984). Dimensions of organizational task environments. Administrative Science Quarterly, 29, 52–73.

    Google Scholar 

  • Engelen, P. J., Heugens, P., van Essen, M., Turturea, R., & Bailey, N. (2020). The impact of stakeholders’ temporal orientation on short-and long-term IPO outcomes: A meta-analysis. Long Range Planning. https://doi.org/10.1016/j.lrp.2018.10.003.

    Article  Google Scholar 

  • Fama, E. F., & French, K. R. (2004). New lists: Fundamentals and survival rates. Journal of Financial Economics, 73, 229–269.

    Google Scholar 

  • Feldman, R., & Frondorf, E. (2015). Patent demands and initial public offerings. Stanford Technology Law Review, 19, 52.

    Google Scholar 

  • Fitza, M., Matusik, S. F., & Mosakowski, E. (2009). Do VCs matter? The importance of owners on performance variance in start-up firms. Strategic Management Journal, 30(4), 387–404.

    Google Scholar 

  • Galasso, A., Schankerman, M., & Serrano, C. J. (2013). Trading and enforcing patent rights. The Rand Journal of Economics, 44, 275–312.

    Google Scholar 

  • Gompers, P., & Lerner, J. (1999). An analysis of compensation in the US venture capital partnership. Journal of Financial Economics, 51, 3–44.

    Google Scholar 

  • Graham, S. J., Merges, R. P., Samuelson, P., & Sichelman, T. (2009). High technology entrepreneurs and the patent system: Results of the 2008 Berkeley patent survey. Berkeley Technology Law Review, 24, 1258–1328.

    Google Scholar 

  • Graves, S. B. (1988). Institutional ownership and corporate R&D in the computer industry. Academy of Management Journal, 31, 417–428.

    Google Scholar 

  • Greve, H. R. (2007). Exploration and exploitation in product innovation. Industrial and Corporate Change, 16, 945–975.

    Google Scholar 

  • Grodal, S., Gotsopoulos, A., & Suarez, F. F. (2015). The coevolution of technologies and categories during industry emergence. Academy of Management Review, 40(3), 423–445.

    Google Scholar 

  • Guellec, D., & Van Pottelsberghe de la Potterie, B. (2007). The economics of the European patent system: IP policy for innovation and competition. Oxford: Oxford University Press.

    Google Scholar 

  • Hall, B. H., Jaffe, A., & Trajtenberg, M. (2005). Market value and patent citations. RAND Journal of economics, 16–38.

  • Hall, B. H., & Lerner, J. (2009). The financing of R&D and innovation. NBER Working Paper no. w15325.

  • Hall, B. H., & Ziedonis, R. (2001). The patent paradox revisited: An empirical study of patenting in the U.S. semiconductor industry, 1979–1995. The Rand Journal of Economics, 32, 101–128.

    Google Scholar 

  • Hall, B. H., & Ziedonis, R. (2007). An empirical analysis of patent litigation in the semiconductor industry. University of California at Berkeley working paper, pp. 217–242.

  • Hanley, K. W., & Hoberg, G. (2010). The information content of IPO prospectuses. The Review of Financial Studies, 23(7), 2821–2864.

    Google Scholar 

  • Hanley, K. W., & Hoberg, G. (2012). Litigation risk, strategic disclosure and the underpricing of initial public offerings. Journal of Financial Economics, 103(2), 235–254.

    Google Scholar 

  • Hannigan, T. R., Haans, R. F., Vakili, K., Tchalian, H., Glaser, V. L., Wang, M. S., et al. (2019). Topic modeling in management research: Rendering new theory from textual data. Academy of Management Annals, 13(2), 586–632.

    Google Scholar 

  • Hansen, G. S., & Hill, C. W. (1991). Are institutional investors myopic? A time-series study of four technology-driven industries. Strategic Management Journal, 12, 1–16.

    Google Scholar 

  • Heckman, J., & Navarro-Lozano, S. (2004). Using matching, instrumental variables, and control functions to estimate economic choice models. Review of Economics and Statistics, 86, 30–57.

    Google Scholar 

  • Hsu, D. H. (2006). Venture capitalists and cooperative start-up commercialization strategy. Management Science, 52(2), 204–219.

    Google Scholar 

  • Iacus, S. M., King, G., & Porro, G. (2011). Multivariate matching methods that are monotonic imbalance bounding. Journal of the American Statistical Association, 106(493), 345–361.

    Google Scholar 

  • Iacus, S. M., King, G., & Porro, G. (2012). Causal inference without balance checking: Coarsened exact matching. Political analysis, 20(1), 1–24.

    Google Scholar 

  • Jaffe, A., & Lerner, J. (2005). Innovation and its discontents: How our broken patent system is endangering innovation and progress, and what to do about it. Princeton: Princeton University Press.

    Google Scholar 

  • Katila, R., & Ahuja, G. (2002). Something old, something new: A longitudinal study of search behavior and new product introduction. Academy of Management Journal, 45, 1183–1194.

    Google Scholar 

  • Kearney, C., & Liu, S. (2014). Textual sentiment in finance: A survey of methods and models. International Review of Financial Analysis, 33, 171–185.

    Google Scholar 

  • Lahr, H., & Mina, A. (2016). Venture capital investments and the technological performance of portfolio firms. Research Policy, 45(1), 303–318.

    Google Scholar 

  • Lanjouw, J. O., & Schankerman, M. (2004). Patent quality and research productivity: Measuring innovation with multiple indicators. The Economic Journal, 114, 441–465.

    Google Scholar 

  • Lee, S. H., Bach, S. B., & Baik, Y. S. (2011). The impact of IPOs on the values of directly competing incumbents. Strategic Entrepreneurship Journal, 5(2), 158–177.

    Google Scholar 

  • Lee, B. H., Struben, J., & Bingham, C. B. (2018). Collective action and market formation: An integrative framework. Strategic Management Journal, 39(1), 242–266.

    Google Scholar 

  • Leiponen, A., & Delcamp, H. (2019). The anatomy of a troll? Patent licensing business models in the light of patent reassignment data. Research Policy, 48(1), 298–311.

    Google Scholar 

  • Lerner, J. (1999). The government as venture capitalist: The long-run impact of the SBIR program. The Journal of Business, 72(3), 285–318.

    Google Scholar 

  • Lerner, J., Seru, A. (2017). The use and misuse of patent data: Issues for corporate finance and beyond. NBER Working Paper 24053, National Bureau of Economic Research.

  • Li, F. (2010). Survey of the literature. Journal of Accounting Literature, 29, 143–165.

    Google Scholar 

  • Loken, E., & Gelman, A. (2017). Measurement error and the replication crisis. Science, 355(6325), 584–585.

    Google Scholar 

  • Loughran, T., & McDonald, B. (2013). IPO first-day returns, offer price revisions, volatility, and form S-1 language. Journal of Financial Economics, 109, 307–326.

    Google Scholar 

  • Loughran, T., & McDonald, B. (2014). Measuring readability in financial disclosures. The Journal of Finance, 69(4), 1643–1671.

    Google Scholar 

  • Loughran, T., & McDonald, B. (2016). Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), 1187–1230.

    Google Scholar 

  • Loughran, T., & Ritter, J. (2004). Why has IPO underpricing changed over time? Financial Management, 33, 5–37.

    Google Scholar 

  • Lowry, M., & Shu, S. (2002). Litigation risk and IPO underpricing. Journal of Financial Economics, 65, 309–336.

    Google Scholar 

  • Morricone, S., Munari, F., Oriani, R., & De Rassenfosse, G. (2017). Commercialization strategy and IPO underpricing. Research Policy, 46(6), 1133–1141.

    Google Scholar 

  • Mueller, E., Cockburn, I. M., & MacGarvie, M. (2012). Access to intellectual property for innovation: Evidence on problems and coping strategies from German firms. Research Policy, 42, 529–541.

    Google Scholar 

  • Munari, F., & Toschi, L. (2014). Running ahead in the nanotechnology gold rush. Strategic patenting in emerging technologies. Technological Forecasting and Social Change, 83(1), 194–207.

    Google Scholar 

  • Nohria, N., & Gulati, R. (1996). Is slack good or bad for innovation? Academy of Management Journal, 39(5), 1245–1264.

    Google Scholar 

  • Pagano, M., Panetta, F., & Zingales, L. (1998). Why do companies go public. Journal of Finance, 53, 27–63.

    Google Scholar 

  • Pahnke, E. C., Katila, R., & Eisenhardt, K. M. (2015). Who takes you to the dance? How partners’ institutional logics influence innovation in young firms. Administrative Science Quarterly, 60(4), 596–633.

    Google Scholar 

  • Paik, Y., & Zhu, F. (2016). The impact of patent wars on firm strategy: Evidence from the global smartphone industry. Organization Science, 27(6), 1397–1416.

    Google Scholar 

  • Pollock, T. G., & Gulati, R. (2007). Standing out from the crowd: The visibility-enhancing effects of IPO-related signals on alliance formation by entrepreneurial firms. Strategic Organization, 5, 339–372.

    Google Scholar 

  • Pollock, T. G., & Rindova, V. P. (2003). Media legitimation effects in the market for initial public offerings. Academy of Management Journal, 46, 631–642.

    Google Scholar 

  • Reitzig, M., Henkel, J., & Heath, C. (2007). On sharks, trolls, and their patent prey-Unrealistic damage awards and firms’ strategies of “being infringed”. Research Policy, 36(1), 134–154.

    Google Scholar 

  • Reuer, J. J., Tong, T. W., & Wu, C. W. (2012). A signaling theory of acquisition premiums: Evidence from IPO targets. Academy of Management Journal, 55(3), 667–683.

    Google Scholar 

  • Rindova, V. P., & Petkova, A. P. (2007). When is a new thing a good thing? Technological change, product form design, and perceptions of value for product innovations. Organization Science, 18(2), 217–232.

    Google Scholar 

  • Rosa, J. A., Porac, J. F., Runser-Spanjol, J., & Saxon, M. S. (1999). Sociocognitive dynamics in a product market. Journal of Marketing, 63, 64–77.

    Google Scholar 

  • Samila, S., & Sorenson, O. (2010). Venture capital as a catalyst to commercialization. Research Policy, 39(10), 1348–1360.

    Google Scholar 

  • Samila, S., & Sorenson, O. (2017). Community and capital in entrepreneurship and economic growth. American Sociological Review, 82(4), 770–795.

    Google Scholar 

  • Santos, F. M., & Eisenhardt, K. M. (2009). Constructing markets and shaping boundaries: Entrepreneurial power in nascent fields. Academy of Management Journal, 52(4), 643–671.

    Google Scholar 

  • Somaya, D. (2003). Strategic determinants of decision not to settle patent litigation. Strategic Management Journal, 24, 17–38.

    Google Scholar 

  • Somaya, D. (2012). Patent strategy and management: An integrative review and research agenda. Journal of Management, 38, 1084–1114.

    Google Scholar 

  • Stuart, T. E., Hoang, H., & Hybels, R. C. (1999). Interorganizational endorsements and the performance of entrepreneurial ventures. Administrative Science Quarterly, 44, 315–349.

    Google Scholar 

  • Valentini, G. (2012). Measuring the effect of M&A on patenting quantity and quality. Strategic Management Journal, 33, 336–346.

    Google Scholar 

  • Wall Street Journal (2013) IBM Hits Twitter With Patent Infringement Claims Ahead of IPO. November 4, 2013. Available at: https://www.wsj.com/articles/DJFVW00020131104e9b4t49zm?mod=searchresults&page=1&pos=2.

  • Wies, S., & Moorman, C. (2015). Going public: How stock market listing changes firm innovation behavior. Journal of Marketing Research, 52(5), 694–709.

    Google Scholar 

  • Wu, G. A. (2011). The effect of going public on innovative productivity and exploratory search. Organization Science, 23, 928–950.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. UCL School of Management, University College London, 1 Canada Square, London, E14 5AB, UK

    Enrico Forti

  2. Manhattan College, O’Malley School of Business, 4513 Manhattan College Parkway, Riverdale, NY, 10471, USA

    Enrico Forti

  3. SDA Bocconi School of Management, Via Sarfatti 10, 20136, Milan, Italy

    Serena Morricone

  4. Department of Management, University of Bologna, Via Capo di Lucca, 34, 40126, Bologna, Italy

    Federico Munari

Authors
  1. Enrico Forti
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Serena Morricone
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Federico Munari
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Serena Morricone.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Authors are listed in alphabetical order.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Forti, E., Morricone, S. & Munari, F. Litigation risks and firms innovation dynamics after the IPO. J. Ind. Bus. Econ. 48, 291–313 (2021). https://doi.org/10.1007/s40812-020-00161-y

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40812-020-00161-y

Keywords

JEL Classification

Search

Navigation