Earnings targets, strategic patent sales, and patent trolls

Innovative public firms sell significantly more patents in the last month of their fiscal year compared to earlier in the year. Consistent with reporting incentives driving these sales, final month patent sales are disproportionately internally generated, non-core patents with high potential accounting gains. Strategic patent sales are more pronounced among firms with incentives to meet earnings expectations – especially in periods when firms narrowly beat expectations and when executive incentives predominate. Consistent with these incentives, managers engage in high insider equity sales following strategic patent sales. In contrast, final month patent sales are less likely for private firms. Patents sold in the last month are litigated more frequently because they are disproportionately sold to “patent trolls”, who opportunistically acquire patents to engage in litigation. We highlight a novel consequence and externality of corporate reporting incentives: its contribution to strategic patent sales, which in turn impacts the market for innovation and litigation.