Financial Market Reactions to Patent Litigation: An Event Study of Litigation in Korea

This paper investigates patent litigation in Korea to examine how the stock market responds to a patent litigation announcement and determine whether the response is consistent with the final litigation outcome. Employing an event study methodology, we investigate cumulative abnormal returns (CARs) based on various litigant characteristics and find a strong and negative stock market response to a litigation announcement, especially towards patent owners and small firms. The final outcome of litigation for a small innovator is negatively correlated with a stock market response, even when the patent is found valid and the owner wins the case. This implies that small innovators are more likely to experience a negative response from the stock market, and they are much more vulnerable to patent litigation, paying additional fringe costs to protect their intellectual properties. The study suggests a policy implication in which the litigation process needs to consider such disadvantages to small innovators as a means of improving procedural fairness in patent litigation.