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Are patents signals for the IPO market? An EU–US comparison for the software industry

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  • Diego Useche

    (GREThA - Groupe de Recherche en Economie Théorique et Appliquée - UB - Université de Bordeaux - CNRS - Centre National de la Recherche Scientifique)

Abstract

This study investigates empirically whether patents can be signals to financial markets, thus reducing problems of asymmetric information. In particular we study how patenting behaviour impacts on the way investors perceive software firms’ growth potential through an increase in the amount invested at the initial public offering (IPO) of firms in the US and Europe. This study performs regressions on the relationship of patent applications before IPO and the amount of money collected at the IPO, while controlling other factors that may influence IPO performance. We also attempt to account for a potential source of endogeneity problems that can arise for self-selection bias and simultaneity between the number of patent applications prior to going public and the amount of money collected at IPO. We find significant and robust positive correlations between patent applications and IPO performance. The signalling power of patenting is significantly different for US and European companies, and is related to the difficulty in obtaining a signal and its scarcity. An additional patent application prior to IPO increases IPO proceeds by about 0.507% and 1.13% for US and European companies, respectively. Results suggest that a less ‘applicant friendly’ patenting system increases the credibility of patents as signals and their value for IPO investors.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Diego Useche, 2014. "Are patents signals for the IPO market? An EU–US comparison for the software industry," Post-Print hal-01135634, HAL.
    • Handle: RePEc:hal:journl:hal-01135634
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    Cited by:

    1. Morricone, Serena & Munari, Federico & Oriani, Raffaele & de Rassenfosse, Gaetan, 2017. "Commercialization Strategy and IPO Underpricing," Research Policy, Elsevier, vol. 46(6), pages 1133-1141.
    2. Giancarlo Giudici & Silvio Vismara, 2021. "IPOs and Entrepreneurial Firms," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 17(8), pages 766-852, October.
    3. Diego Useche & Sophie Pommet, 2021. "Where do we go? VC firm heterogeneity and the exit routes of newly listed high-tech firms," Small Business Economics, Springer, vol. 57(3), pages 1339-1359, October.
    4. Drivas, Kyriakos & Gounopoulos, Dimitrios & Konstantios, Dimitrios & Tsiritakis, Emmanuel, 2018. "Trademarks, Firm Longevity and IPO Underpricing," MPRA Paper 89430, University Library of Munich, Germany.
    5. Wang, Taiyuan & Qureshi, Israr & Deeds, David & Ren, Yi, 2019. "How do technology ventures signal IPO quality? A configurational approach," Journal of Business Research, Elsevier, vol. 99(C), pages 105-114.
    6. Massimo G. Colombo & Benedetta Montanaro & Silvio Vismara, 2023. "What drives the valuation of entrepreneurial ventures? A map to navigate the literature and research directions," Small Business Economics, Springer, vol. 61(1), pages 59-84, June.
    7. Philippe Gorry & Diego Useche, 2018. "Orphan Drug Designations as Valuable Intangible Assets for IPO Investors in Pharma-Biotech Companies," NBER Chapters, in: Economic Dimensions of Personalized and Precision Medicine, pages 305-334, National Bureau of Economic Research, Inc.
    8. Zhang, Lili & Guo, Ying & Sun, Ganlu, 2019. "How patent signals affect venture capital: The evidence of bio-pharmaceutical start-ups in China," Technological Forecasting and Social Change, Elsevier, vol. 145(C), pages 93-104.
    9. Gnekpe, Christian & Jimenez, Alfredo, 2023. "Smoke signal: When firms' patent strategy and local patent protection system affect equity stakes in cross-border acquisitions," Journal of International Management, Elsevier, vol. 29(6).
    10. Cédric Gossart & Altay Özaygen & Müge Özman, 2020. "Are Litigated Patents More Valuable? The Case of LEDs," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 11(3), pages 825-844, September.
    11. Fisch, Christian & Meoli, Michele & Vismara, Silvio & Block, Jörn H., 2022. "The effect of trademark breadth on IPO valuation and post-IPO performance: an empirical investigation of 1510 European IPOs," Journal of Business Venturing, Elsevier, vol. 37(5).
    12. Pilar Beneito & Maria E. Rochina-Barrachina & Amparo Sanchis, 2023. "Female R&D teams and patents as quality signals in innovative firms," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 32(7), pages 891-922, October.
    13. Billington, Stephen D. & Colvin, Christopher L. & Coyle, Christopher, 2025. "Financing Innovation: The Role of Patent Examination," CAGE Online Working Paper Series 767, Competitive Advantage in the Global Economy (CAGE).
    14. Fafaliou, Irene & Konstantios, Dimitrios & Giaka, Maria & Polemis, Michael, 2024. "Does innovation drive corporate sustainability performance?," MPRA Paper 122576, University Library of Munich, Germany.
    15. Jean Belin & Marianne Guille & Nathalie Lazaric & Valérie Mérindol, 2019. "Defense Firms Adapting to Major Changes in the French R&D Funding System," Defence and Peace Economics, Taylor & Francis Journals, vol. 30(2), pages 142-158, February.
    16. Fafaliou, Irene & Giaka, Maria & Konstantios, Dimitrios & Polemis, Michael, 2020. "Revisiting the sustainability-innovation nexus: Lessons learned from the US," MPRA Paper 99834, University Library of Munich, Germany.
    17. Sunny Hahn & Jina Kang, 2017. "Complementary or conflictory?: the effects of the composition of the syndicate on venture capital-backed IPOs in the US stock market," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 44(1), pages 77-102, March.
    18. Tumasjan, Andranik & Braun, Reiner & Stolz, Barbara, 2021. "Twitter sentiment as a weak signal in venture capital financing," Journal of Business Venturing, Elsevier, vol. 36(2).
    19. Mestwerdt, Sönke & Mrożewski, Matthias & Sydow, Alisa & Burkert, Nathalie, 2025. "Unveiling signaling processes in early-stage cross-border investment: Evidence from South African entrepreneurs and European business angels," Journal of World Business, Elsevier, vol. 60(5).
    20. Maoyan She & Die Hu & Yuandi Wang & Li Li, 2023. "How do top management team characteristics affect government R&D subsidy grants? Evidence from an information economics perspective," Asian Business & Management, Palgrave Macmillan, vol. 22(1), pages 330-353, February.
    21. Julian Bafera & Simon Kleinert, 2023. "Signaling Theory in Entrepreneurship Research: A Systematic Review and Research Agenda," Entrepreneurship Theory and Practice, , vol. 47(6), pages 2419-2464, November.
    22. Li Yao & He Ni, 2023. "Prediction of patent grant and interpreting the key determinants: an application of interpretable machine learning approach," Scientometrics, Springer;Akadémiai Kiadó, vol. 128(9), pages 4933-4969, September.
    23. Diego Useche & Sophie Pommet, 0. "Where do we go? VC firm heterogeneity and the exit routes of newly listed high-tech firms," Small Business Economics, Springer, vol. 0, pages 1-21.
    24. Xue Yang & Hao Zhang & Die Hu & Bingde Wu, 2023. "The timing dilemma: understanding the determinants of innovative startups’ patent collateralization for loans," Small Business Economics, Springer, vol. 60(1), pages 371-403, January.
    25. Cristina Quintana-García & Carlos A. Benavides-Velasco & Vanesa F. Guzmán-Parra, 2016. "Science-based Firms Going Public: The Role of Patent Indicators and Top Management Teams," Industry and Innovation, Taylor & Francis Journals, vol. 23(3), pages 243-259, April.

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    Keywords

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    JEL classification:

    • O34 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Intellectual Property and Intellectual Capital
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D
    • G2 - Financial Economics - - Financial Institutions and Services

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