How Do Peer Firms Respond to Patent Grants?
Abstract
Patent grants can create either opportunities or threats for technologically related firms, but their net effect is difficult to predict. Economic theory offers competing predictions. Knowledge spillovers imply that a focal firm's innovation may create complementary investment opportunities for technologically related peers, whereas stronger intellectual property rights and product-market rivalry imply competitive threats that discourage follow-on innovation in the protected domain. To distinguish between these competing forces, I use abnormal stock returns around patent grant dates to classify whether markets interpret a focal patent as creating opportunities or threats for technologically related peers. I then examine how peers adjust their innovation, acquisition, and financing policies following these patent grants. I find that peers increase R&D, pursue follow-on innovation in related technological domains, and engage in technology-related acquisitions following complementary patent grants, but redirect innovation toward different technologies following rivalrous patent grants. These patterns are stronger when peers possess greater absorptive capacity and financial flexibility and when legal constraints increase the costs of competing in the protected technological domain.
Presentation: FMA Doctoral Student Consortium (2026); Brownbag Seminar at OSU (2026)
Funding the Uncommon: Financial Incentives and Corporate Investment in Rare Disease Innovation (draft available upon request)
Abstract
Innovation with high social value often attracts insufficient private investment because expected commercial returns are limited. This paper examines whether financial incentives can redirect corporate innovation toward such projects. I study the FDA’s Rare Pediatric Disease Priority Review Voucher program and exploit its introduction in a difference-in-differences framework. Using detailed clinical trial data, I show that financial incentives increase public firms’ participation in rare disease drug development, induce entry by new firms, and improve clinical trial completion. The findings suggest that government incentives can reshape corporate innovation by increasing the expected returns to socially valuable but commercially unattractive projects.