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Does Knowledge Protection Benefit Shareholders? Evidence from Stock Market Reaction and Firm Investment in Knowledge Assets

Published online by Cambridge University Press:  17 April 2018

Buhui Qiu  and
Teng Wang
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Abstract

This article studies whether knowledge protection affects shareholder value and firms’ investment in knowledge assets using the staggered adoptions and rejections of the inevitable disclosure doctrine (IDD) by U.S. state courts as exogenous changes in the level of knowledge protection. We find positive (negative) abnormal stock returns around the IDD adoption (rejection) day for firms headquartered in the state, and we uncover a positive IDD treatment effect on firms’ investment in knowledge assets. Moreover, the effects on stock returns and knowledge assets investment are stronger in more knowledge-oriented industries and firms. Finally, enhancing knowledge protection does not discourage local entrepreneurial activity.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 3 , June 2018 , pp. 1341 - 1370
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Bobae Choi, Stijn Claessens, Douglas Foster, Janet Gao, Mark Garmaise (the referee), Jarrad Harford (the editor), Harald Hau, Kathleen Johnson, Doowon Lee, Amir Licht, Ben Marshall, Alexandre Mas, Ron Masulis, Nick Nguyen, Enrico Perotti, Tong Zhou, seminar participants at the Federal Reserve Board, Massey University, the University of Newcastle, and the University of Sydney, and conference participants at the 2017 American Economic Association Meeting, the 2017 Financial Management Association (FMA) Annual Meeting, the 2016 Northern Finance Association Meeting, the 2016 Financial Management Association Asia Pacific Conference, the 2016 Eastern Finance Association Meeting, and the 2015 Financial Research Network (FIRN) Annual Conference for helpful comments and suggestions. We thank lawyers Randall Kahnke and Kerry Bundy for generously sharing with us their insights into the state-by-state adoption and rejection of the inevitable disclosure doctrine. We gratefully acknowledge the FMA for the 2016 FMA Asia Pacific Conference Best Paper Award in Corporate Finance/Financial Institutions for an earlier version of the paper. We thank Andy Law for his excellent research assistance. All errors are our own. The views expressed in this article are solely those of the authors and should not be interpreted as reflecting the views of the Board of Governors or the staff of the Federal Reserve System.

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