The effect of voluntary patent disclosure

Abstract

A firm’s voluntary patent disclosure is important to reduce the level of information asymmetry and to announce the success of innovative activities to the stock market. In Korea, the patent disclosures became no longer mandatory after the Capital market integration act of Korea which was executed on February 3, 2009; therefore, in terms of strategic management, this left firms to use patent disclosures in their own way. Previous studies, however, have only focused on evaluating the granting of patents but not on the importance of disclosing them to the public. To emphasize the activity of patent disclosure, this study investigates the different market reactions to the firms’ patent disclosure activities. This study is one of the first studies to empirically demonstrate the effectiveness of disclosures with samples of both disclosed and non-disclosed patents. Using event study methodology and the one-way ANOVA, we examine whether the stock market reacts to voluntary patent disclosures or not. The results show that, in case of KOSDAQ-listed firms, there is a statistically significant positive reaction only to the firms who disclosed their patents. To provide a further insight, cross-sectional regression analysis is used to identify the factors that determine the direction and magnitude of the market value change. These empirical findings show that firms can use voluntary disclosure of patents to manage their stock prices strategically. This study can help managers recognize the importance of disclosure activity, and it indicates that managers should try to announce the success of their research and development investment by disclosing it actively and strategically.