The Global Economic Impact of Private Equity Report 2008 - World ...

challenges posed by our methodology. The patents areconcentrated in the years before and immediately after thebuyout. Again, this reflects the “back‐end loaded” nature ofthe sample and the lags associated with the patent grantprocess. We obviously cannot see successful patents filedfive years after a buyout undertaken in 2005, and may notsee many of those filed five years after a buyout in 2000:patents take on average over 30 months to issue, with asubstantial minority taking considerably longer. 4We capture a variety of information about the patent awards.Over the past two decades, several quantitative measuresof patent quality have become widely adopted (Jaffe andTrajtenberg 2002; Lanjouw, Pakes and Putnam 1998).These measures rely on the citations either to or by thepatent award to characterize the grants (called forwardand backward citations respectively). Citations are extremelyimportant in patent filings, since they serve as “propertymarkers” delineating the scope of the granted claims.Patents with more forward citations are typically interpretedin the literature as having more impact or being moreimportant than other awards.Economists have also looked at the distribution of thesecitations. Patents that cite patents in a broader array oftechnology classes are regarded as having more “originality”;those that are cited by a more technologically dispersedarray of patents, more “generality”. Both measures havebeen interpreted as indicative of the fundamental importanceof the research being patented. 5In addition to the truncation problem delineated above,we also face challenges around divisional buyouts andcases where the target firm was ultimately acquired byanother corporation. In these instances, the firm’s patentsmay not be assigned to the target but rather to the corporateparent. Consider, for instance, a divisional buyout. Many ofthe patents applied for three years before the buyout arelikely to be issued before the private equity investment: inmost instances, these will be assigned to the corporateparent. Even some patents applied for by employees of thebought‐out division that are issued after the buyout maynonetheless be assigned to the corporate parent ratherthan to the target.While we are unable to comprehensively solve this problem,we can partially address the issue. In unreported regressions,we repeat the analyses, capturing some, though not all,of the additional patents associated with bought‐out firmsthat are units of larger concerns during part of the periodfrom three years before to five years after the investment.In particular, we first collect the names of all the individualinventors in the patents applied for by each privateequity‐backed firm during the study period. We then identifyall patents either assigned to its corporate parent prior to theprivate equity investment or assigned to the target’s acquirerafter the private equity investment that had an inventor whowas on the list. We feel confident that this criterion is aconservative one: it will help us identify some, though notall, of the missing patents associated with the target. It will,however, identify few “false positives”, or patents assignedto the parent that are not associated with the target. If wedelete these supplemental patents from the analyses below,the statistical and economic significance of the results doesnot change materially.Finally, we gathered information on patents similar tothe ones awarded to the private equity‐backed firms. Inparticular, we identified all other patents assigned to thesame primary US patent class and with the same grantyear as the sample firms’ awards. We computed the meannumber of citations per year to these patents, as well asthe mean generality and originality of these matches. Thesecomparison sets allow us to control for any industry‐widechanges that may have happened around the time of theprivate equity transactions.3. MethodologyThis section describes the methodological choices we makein the empirical analysis that follows.In our analysis, we will focus on the quality, size and structureof the target’s patent portfolios in four ways:1. We examine the patents applied for before and after theprivate equity investment, using citations as the proxy forthe quality, or economic importance. 6 In particular, weexamine whether their citations in subsequent documentschange before and after the transaction.2. We examine whether the patents are substantially moreor less fundamental, or basic, after the transactions.In particular, we use the measures of patent originalityand generality, which are computed using the dispersionof patent classes in the patents that cite or are cited bythe awards.3. We examine variations in the propensity of firms tofile for patent protection before and after privateequity investments.4Statistics available at http://www.uspto.gov/web/offices/com/annual/2006/50304_table4.html (accessed 21 October 2007). It is natural to ask whywe only examine successful patent applications, rather than all patent filings. Unfortunately, the USPTO did not publish information on applications forpatents filed prior to November 2000, and even these data are imperfect: not all applications in the US are published and information on successfulapplications is often removed from the database of applications.5Each patent is assigned to a primary (three-digit) patent class as well as a subclass using the USPTO’s classification scheme. These classificationsare important to the USPTO as they are used to search subsequent awards. We follow the literature in computing these measures as one minus theHerfindahl index of the primary patent class of the cited or citing patents. Thus, a higher measure of originality or generality means that the patent isdrawing on or being drawn upon by a more diverse array of awards.6The widespread acceptance of patent citations as an indicator of economic importance is discussed in Griliches (1990) and Jaffe and Trajtenberg (2002).30 Large-sample studies: Long-run investmentThe Global Economic Impact of Private Equity Report 2008