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Competition and the value of innovation

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  • Hu, Muhan
  • Ma, Linxiang

Abstract

We examine how competition affects the economic returns firms derive from their patented innovations. Using a stock market-based measure that reflects the discounted cash flows of newly granted patents, we document a robust negative relationship between competition intensity and the economic value of patents. To establish causality, we implement a quasi-experimental design and consider horizontal M&A as events that are likely to reduce competition for non-merging industry peers. Leveraging the random timing of peers’ patent grant dates within a narrow window around M&A announcements, we show that patents granted immediately after such events on average experience a 2.8% increase in value. This effect is stronger for deals that are more likely to be anti-competitive, but is absent for non-horizontal mergers that are unlikely to alter competition intensity. Overall, we offer new insights into the competition-innovation relationship by showing that competition weakens the economic returns that incentivize firm innovation.

Suggested Citation

  • Hu, Muhan & Ma, Linxiang, 2026. "Competition and the value of innovation," Journal of Corporate Finance, Elsevier, vol. 96(C).
  • Handle: RePEc:eee:corfin:v:96:y:2026:i:c:s0929119925001774
    DOI: 10.1016/j.jcorpfin.2025.102909
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    Keywords

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    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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