Shareholder Short-termism and Intellectual Property Infringement

This paper examines how corporate infringement with respect to intellectual property (IP) is associated with institutional investors’ investment horizons. Using a comprehensive and unique database of IP infringement cases involving patents, trademarks, and trade secrets, we show that firms’ frequency and likelihood of being sued for IP infringement increase with short-term institutional ownership but yet are unrelated to or negatively associated with other types of institutional investors. We use both a quasi-natural experiment of mergers between financial institutions and instrumental variable regressions based on fund flows to support a causal effect of shareholders’ short-termism on corporate IP infringement. The likelihood of injunctions granted by courts and the chance of being entangled in long lawsuit cases are also higher for firms with greater short-term institutional ownership. These patterns can be attributed to short-term institutional investors who urge managers to aggressively pursue new product areas, which likely leads to IP disputes. Furthermore, the effect of short-term institutional ownership increases with peer competition and with firms’ exploration with respect to new products and technologies