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Corporate financing and investment policies with patent litigation
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Liu, Du (2021) Corporate financing and investment policies with patent litigation. PhD thesis, University of Warwick.
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Official URL: http://webcat.warwick.ac.uk/record=b3816111
Abstract
This thesis consists of three essays in theoretical corporate finance with a particular focus on patent litigation. In the second chapter co-authored with Danmo Lin and Elizabeth Whalley, we use a compound real options model to investigate product firms' strategic interactions in intellectual property litigation. Subject to financing constraints, an alleged infringer firm (\challenger") and an infringed firm (\incumbent") pay for their ongoing litigation cost using operating cash flows from product market profits. We consider the challenger's strategy to exit the market during litigation due to a shortage of funds, the incumbent's strategy to withdraw from value-reducing litigation or to force the challenger to exit the market by a threat to litigate, and firms' strategies to set up royalty payments to avoid a lawsuit, or to settle with each other after a lawsuit is filed. By focusing on each firm's ability and willingness to pay for litigation costs, we find that product market characteristics such as the challenger's profit relative to the incumbent's loss of profits due to the alleged infringement (\gain-to-loss ratio") have to be high enough for settlements to be possible. Settlements are also more likely in less volatile product markets, with more questionable patent validity, and when litigation costs are similar for the two firms. Our model generates new testable implications regarding IP litigation with financing considerations. In the third chapter co-authored with Danmo Lin and Elizabeth Whalley, we take a first theoretical step toward understanding how legal systems influence corporate innovation by examining the impact of financial constraints on firms' strategies in innovation disputes and R&D decisions. In the presence of capital market frictions, we develop a compound real options model to examine product ix firms' sequential decisions during and before patent litigation. We show that the English rule (i.e.,\ loser pays") and the American rule (i.e., \each litigant pays its own cost") interact differently with firms' financial constraints, causing the English rule to shift the effective bargaining power from the patent-owning firm (the \incumbent") to the alleged infringing firm (the \challenger"). We discover that, under the English rule, (1) litigation rate is lower when a key product market characteristic (i.e., \gain-to-loss ratio") is high; (2) royalty rates in an ex-post settlement (i.e., settlement after the filing of a lawsuit) are lower; (3) an opposite effect of the incumbent's winning probability and a stronger effect of product market volatility on settlement likelihood; (4) firms have lower innovation incentives, all compared to the American rule. Our model also generates new testable implications regarding IP litigation with financing considerations.
The fourth chapter of the thesis studies the impact of patent litigation on mergers and acquisitions (M&As) and R&D incentives. I develop a multi-stage static model where a firm that has related but sleeping patents can interfere with patent litigation outcomes between two producing firms by merging with either the plaintiff or the defendant. By considering the impact of patent litigation on bargaining shares in M&As, the firm can choose whether to sleep patents to gain litigation benefits or commercialise patents without the possibility of M&As. I also analyse the innovation incentives of the plaintiff and integrate them into a coherent framework. The results show that patent litigation is a driving force for firms to engage in M&As and strategic patenting. The model shows patent litigation affects firms' M&A choice and merger lowers litigation risk in intensive market competition. This chapter also discovers a positive impact of litigation benefits gained through M&As on firms' innovation incentives.
Item Type: | Thesis (PhD) | ||||
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Subjects: | H Social Sciences > HD Industries. Land use. Labor H Social Sciences > HG Finance K Law [LC] > K Law (General) |
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Library of Congress Subject Headings (LCSH): | Consolidation and merger of corporations, Patents laws and legislation, Corporations -- Finance, Intellectual property, Intellectual capital, Costs (Law) | ||||
Official Date: | June 2021 | ||||
Dates: |
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Institution: | University of Warwick | ||||
Theses Department: | Warwick Business School | ||||
Thesis Type: | PhD | ||||
Publication Status: | Unpublished | ||||
Supervisor(s)/Advisor: | Whalley, Elizabeth ; Lin, Danmo | ||||
Sponsors: | China Scholarship Council | ||||
Format of File: | |||||
Extent: | x, 219 leaves : illustrations | ||||
Language: | eng |
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