Patented innovation and left-tail risk: Evidence from China

Abstract

This study investigates the impact of patented innovation on the left-tail risk of stock price, measured as the 1% value at risk (VaR) and expected shortfall (ES). Using the sample of all listed firms in the Chinese A-share market from 2007 to 2020, we find that the quantity and quality of patents significantly decrease left-tail risk. Second, the effect is more pronounced for firms in regions with patent pledge systems or stronger intellectual property rights protection. Short-selling constraints and the engagement of retail investors hinder patented innovation from reducing left-tail risk. Third, we further explore the mechanisms and find that patented innovation enhances financial performance, mitigates financial constraints, and attracts long-term institutional investors, thereby decreasing left-tail risk.