Patent Information Affects Retail Investors' Decisions

THE FACT THAT US PATENT LIBRARIES, WHEN PHYSICALLY ACCESSIBLE, HAD EFFECTS ON TRADE VOLUMES AND RETURN MEANS THAT PATENTS ARE A SOURCE OF INFORMATION THAT COMPLEMENTS FINANCIAL STATEMENTS AND ANALYST REPORTS, ACCORDING TO TIM MARTENS

That retail investors use financial statements and analyst reports (so-called curated disclosures) to form their investment decisions is not a secret and has been largely investigated by literature. However, what may look like a novelty to the eyes of many is that they may complement this information with “uncurated disclosures.” As a matter of fact, a forthcoming article on Review of Accounting Studies proves the importance of information sources such as patents for retail investors.
 
 
Even if neglected until now, this topic is of great interest for two categories of market players - regulators and managers, according to Bocconi Assistant Professor Tim Martens (Department of Accounting). Specifically, whether retail investors use uncurated disclosures must be on the agenda of regulators because their aim is to guarantee equal access to public information. Instead, managers may exploit these results to adapt their communication strategies to investors by including uncurated disclosures.
 
Patents, when the perimeter of analysis is the US, are published by the US Patent and Trademark Office (USPTO) and they contain value-relevant information about firms that are generally used by the more sophisticated market participants. Hence, it might appear clearer now why the exploitation of patent information may bring benefits to retail investors.
 
However, due to the technical nature of their content, patents are not easy to interpret and the cost of processing is heavy enough to encourage the least sophisticated investors to ignore them.
 
In order to provide a solid answer to the question raised, Professor Martens exploits the pre-Internet patent system in the United States from 1991 to 1996. As a matter of fact, the USPTO started in 1870 a process to disseminate patents’ information firstly by distributing copies of patent documents to libraries across the United States and then, in 1977, by designating at least one Patent and Trademark Depository Library (PTDL) in every state. In particular, the USPTO targeted areas with large populations and with high patent and trademark activity.
 
Specifically, the mean of the local trading volume in the three days following a patent publication was notably higher in counties with a PTDL than in counties without one: $550.25 and $205.07, respectively.
 
Even if the introduction of the Internet has made the PTDL program obsolete, Professor Martens clarifies that the features of his setting still allow for generalization of the findings. Indeed, any other disclosure channel that offers access to historical and current patents documents to retail investors would mostly affect them in the same way. Also, the format of patents documents hasn’t changed significantly over time.
 
According to the results, the local availability of patent information was positively associated with local trading volume after the release of a patent. When a PTDL was present, the trading volume of local retail investors after the release of a patent increased by 4.6%, the number of local trades by 0.4% and the probability of a local trade by 0.5%. This effect was amplified when the information was of high value or when investors were closer to the libraries.
 
To exclude any additional determinant that might drive the results just mentioned, Professor Martens introduces extreme snowfalls as a source of variation in local access to patent information. As a matter of fact, extreme snowfalls inhibited local investors to gather information from patents since physical access was required to PTDLs. Not surprisingly, the positive associations found in the previous paragraph breaks down on extremely snow days.
 
Lastly, worth consideration is the result Tim Martens sheds light on: the existence of a PTDL increased the return of trades made by retail investors between 0.7% and 7.9%. This conclusion confirms the relevance of the topic for regulators whose main concern is maintaining equal access to public information and protecting retail investors.
 
Martens, T. “The disclosure function of the U.S. patent system: evidence from the PTDL program and extreme snowfall.” Rev Account Stud (2021). https://doi.org/10.1007/s11142-021-09641-5.

 

by Giulia Sargiacomo