Do Markets Reward Intensive Innovation? Evidence From Patent Grant Patterns

ABSTRACT

This study examines whether stock markets react to the temporal patterns of corporate patent activity, focusing on whether frequent and consistent patent grants signal superior innovation capability. Building on the notion of patent grants as voluntary disclosures of successful R&D, we recognize that while patents and trade secrets operate as substitutes at the individual invention level, they frequently function as complements at the technology portfolio. We develop time‐based measures of patent intensity that capture the continuity, the frequency, and the consistency of a firm's innovation output. We find that five‐day cumulative abnormal returns around patent grant announcements are significantly higher for firms with more frequent patenting and more consistent timing, after controlling for R&D spending, patent portfolio value, firm characteristics, and sample selection. These effects are robust to the exclusion of crisis periods. Over longer horizons, the continuity of patenting becomes the dominant dimension: Fama‐MacBeth regressions reveal that continuous patentees earn higher future risk‐adjusted returns, and calendar‐time portfolios show a significant monthly spread for continuous versus interrupted patentees. However, in contemporaneous valuation tests, pattern characteristics show no incremental association with Tobin's Q beyond conventional innovation quality (citations) and quantity (patent counts) controls, consistent with the interpretation that pattern information is priced through announcement reactions and long‐horizon drift rather than through static valuation multiples. Our findings indicate that patent grant timing patterns provide incremental information beyond traditional innovation metrics, with different pattern characteristics capturing distinct dimensions of innovation signalling.