New academic study of patent litigation and cost of capital

A new study, published July 1 on SSRN, by David Tan (Georgetown University - Department of Strategy/Economics/Ethics/Public Policy) and Jie Yang (Georgetown University - Department of Finance) shows that involvement in patent litigation creates substantial direct and indirect costs for firms.

The authors examine "a novel, hand-collected data set that combines data on observed instances of patent litigation with product-level data to form dyadic plaintiffs-defendant pairs at risk of litigation in the semiconductor industry from 1984 to 2000."  They reviewed this data set to consider several variables associated with a firm’s cost of capital: 1) the Whited and Wu (2006) index for financing constraints, 2) analyst coverage, and 3) institutional ownership concentration.

Their conclusions: controlling for technological and product overlap, pairs of firms involved in litigation are more similar in terms of financing constraint, analyst coverage, and institutional ownership concentration than pairs of firms not involved in litigation.