Intellectual Property Protection and Financial Markets: Patenting vs. Secrecy
Review of Finance
56 Pages Posted: 21 Aug 2015 Last revised: 22 Apr 2021
Date Written: May 1, 2019
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.
Keywords: Trade Secrets, Patents, Intellectual Property, Stock Liquidity, TRIPS
JEL Classification: G14, G30, O31
Suggested Citation: Suggested Citation