Patent Thickets, Stock Returns, and Conditional CAPM

Patent thickets, a phenomenon of fragmented ownership of overlapping patent rights, hamper firms' commercialization of patents and thus deliver asset pricing implications. We show that firms with deeper patent thickets are involved in more patent litigations, launch fewer new products, and become less profitable in the future. These firms are also associated with lower subsequent stock returns, which can be explained by a conditional CAPM based on a general equilibrium model that features heterogeneous market betas conditional on time-varying aggregate productivity. This explanation is supported by further evidence from factor regressions and stochastic discount factor tests