Patent Portfolios and Uncertainty

Abstract

This study explores how investor uncertainty is associated with the structure of companies' patent portfolios. Utilizing a U.S. patent sample, we examine the impact of three key patent portfolio characteristics (total market value, total number, and value dispersion) on market-perceived uncertainty proxied by option-implied volatilities. Our results indicate that the total market value of a patent portfolio is positively associated with market-perceived uncertainty. In addition, holding constant the portfolio's total market value, the market-perceived uncertainty decreases with the number of patents and when patents have similar values (i.e., a lower valuation standard deviation). We also find that equity and option market activity decreases with the number of patents but increases with the patent portfolio value and value dispersion, and market demand for put options (downside risk protections) increases with patent portfolio value and decreases with the number of patents in a portfolio.