Patent Thickets, Stock Returns, and Conditional CAPM

When firms innovate on the basis of prior patents dispersedly owned by different patent assignees, the fragmented patent ownership results in patent thickets that adversely affect the commercialization of these firms’ inventions. We develop a real option model that suggests a negative effect of patent thickets on systematic risk exposure and expected stock returns due to increases in commercialization costs, delays in options exercising, and decreases in future stochastic cash flows. Our empirical analyses based on U.S. patent litigations data, new product announcements data, and public firms’ patents and financial data support these model implications.