Innovation economics, q theory of investment, behavioral finance
Journal of Accounting and Economics, 2022, 74 (1), 101492
Journal of Financial and Quantitative Analysis, 2022, 57 (8), 2899-2928
Patent Thickets and Mergers and Acquisitions (with Logan Emery)
We examine the relation between acquisitions and patent thickets, which are dense webs of overlapping intellectual property rights that create costs by complicating licensing negotiations and increasing the risk of holdup and litigation. We find that firms are less likely to be acquired when their patents are in denser thickets comprised of many patent owners, which expose firms to these costs. In contrast, firms are more likely to be acquired when thickets created by their own patents are denser, which insulate firms from these costs. These relations strengthen with technological overlap between the acquirer and target, which can lead to lower information asymmetry and higher potential synergies. When a firm occupies the same thicket as the acquirer, the probability of being acquired depends on each firm's ability to impose thicket-related costs on the other. We conclude that patent thickets influence acquisition activity because thickets can affect the acquirer's ability to realize synergies.
Price-Path Convexity, Extrapolation, and Short-Horizon Return Predictability (with Huseyin Gulen)
We document a striking negative relation between price-path convexity and future short-horizon returns. Regardless of cumulative return in the period during which convexity is estimated, stocks with the least convex price paths subsequently outperform stocks with the most convex price paths. Our results are not driven by firm size, the bid-ask bounce, illiquidity, or other short-term return predictors. We find similar results in international samples and even at the aggregate market level. We provide evidence that this relation is consistent with investor over-extrapolation of recent price changes at short horizons.
Work in Progress
We present a stylized model of asset pricing in which lenders value collateral using an appraisal, which is defined as the average selling price of similar assets in recent transactions. When valuations change, appraisals lag fair values and cause delayed price adjustment. This delay generates momentum, sellers' markets, asset flipping, and associations between price appreciation, volume, and liquidity. Our results suggest many avenues for fruitful empirical research on asset prices in appraisal-constrained markets.