Management Accounting Section Midyear Meeting

Patent Litigation Risk and Firm Boundaries

• In Event: The Intersection of Managerial and Financial Accounting

Abstract

This paper examines how patent litigation risk shapes firms’ vertical boundaries. A vertically-integrated firm structure exacerbates the operational risk from patent lawsuits and grants patent asserters higher bargaining power by holding up the alleged firm. Consistent with this prediction, I find that firms with higher patent litigation risk tend to be more vertically separate. This association is mainly driven by firms that served as defendants of patent infringement in past patent lawsuits. Further identification strategies using instrumental variables and changes in legal institutions support the inference that litigation risk has a causal impact on firm boundaries. This negative effect of litigation risk on the degree of vertical integration is more pronounced when hold-up concerns are more acute and when coordination needs between supply chain parties are less important. Taken together, I provide evidence on how patent litigation risk affects the economic tradeoffs of firms’ boundary-expanding decisions.

Author

• Fan Wu, Frankfurt School of Finance & Management