Plaintiff Litigation, Institution, and Startup Financing

Prior research has yielded mixed findings regarding the impact of patent litigation on firm financing, with evidence suggesting that patent litigation can influence VCs' perceptions of a start‐up's prospects in both positive and negative ways. Drawing on the institution‐based view, we argue that VCs' interpretation of plaintiff litigation largely rests on the institutional environment in which litigations are launched. Focusing on the context of transition economies, we propose that plaintiff litigation in such environments conveys information about start‐ups' competence in dealing with ambiguous institutions and in developing advanced technologies. We thus hypothesise that plaintiff litigation is positively related to the receipt of investment from high‐status VCs. Our empirical study shows that plaintiff litigation increases the receipt of investments from high‐status VCs by 1.86% in transition economies. Further analyses suggest that the relationship between plaintiff litigation and VC status is more significant in regions with lower anti‐corruption or a higher percentage of state‐owned enterprises (SOEs); the results also show that this relationship is significant in coastal regions and regions with great market heat, yet insignificant in non‐coastal regions and regions with low market heat.