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

4. Finally, we explore whether firms alter their patent filingpractices after the private equity transactions. In particular,we examine whether the changes in patent quality can beexplained by firms increasingly patenting in certain areas.These analyses listed above provide some indications asto the impact of private equity on long‐run investments. Ifindeed we observe higher quality patent filings, and a moretargeted allocation of innovative activity, the patterns may beinterpreted as consistent with the arguments postulated byJensen (1989, 1993) about the salutatory effects of privateequity investments. If there is a decrease in these measuresof innovative activities, we interpret the results as consistentwith the more sceptical views of private equity investment.We also look across the different types of transactionslisted in Table 1, Panel B. For instance, public‐to‐privatetransactions are most common at the top of the privateequity market cycles. Do these transactions have moreof a deleterious impact on innovation?4. AnalysisWe proceed in five steps. First, we report on the analysis ofpatent importance. Second, we examine the fundamentalnature of the patents being awarded. Third, we describe thevarious robustness checks of the results regarding patentquality we undertake in supplemental analyses. Fourth, welook at the quantity of patenting by these firms. Finally, wepresent some findings about the firms’ patent portfoliosbefore and after the private equity investments.A. Measuring patent importanceWe begin by examining the quality of the patents in thesample. The most widely used measure in the literature,as noted above, is patent citations.One essential challenge is determining the number of yearsover which we should compute patent citations. There is aconsiderable degree of serial correlation in patent citations:patents that are highly cited in their first few years tend to becited heavily throughout their lifetimes (Jaffe and Trajtenberg2002). Our sample is back‐end loaded, and we focus oncitations in the year that the patent is issued and the threefollowing calendar years. 7 We examine the sensitivity of theresults to this choice in Section 4C below.Table 2 takes a first look at the citations to the patents filedprior to and after the private equity transactions. The twopanels treat patents filed in the calendar year of the privateequity investment in two different ways: Panel A (on whichwe will focus) compares patents filed in the three calendaryears before and the year of the private equity investmentwith those filed in later years, while Panel B compares thosefiled in the three calendar years before the investment withthose in later years.Focusing on Panel A, we see that, on average, patentsissued before the transactions are cited 1.99 times in thefirst three years after they are granted. In contrast, patentsissued after the transactions are cited 2.49 times over thethree years after the grant date, corresponding to a 25%increase in the number of citations. The patterns are similar,but less sharp, in Panel B.These comparisons are instructive but coarse, since they arebased on the raw citation counts. Figure 2 plots the numberof citations in the three years after the patent grants for eachof the patents in the sample. Figure 3 depicts the averagenumber of citations for the matching patents, where thematching patents are all US patents granted in the same yearand assigned to the same USPTO technology class. 8 Weobserve a clear increase in the average number of citationsfor the private equity‐backed firms. In part, this may reflectthe increased importance of patents in later years, but it alsomay reflect two other changes. As the pace of patentingworldwide has accelerated, the frequency with which patentsget cited may have changed. Furthermore, as private equityinvestments in high‐technology industries have become morecommon (Strömberg 2008), the representation of patents intechnologically dynamic industries may have increased.Figure 3 illustrates these two changes. In this figure, weobserve an increase in the average number of citations forthe matching patents. Thus, it is important to control for thetiming of the patent grant and its technology class.To address these concerns, Table 2 also reports relativecitation counts. These are defined as the number of citationsin the calendar year of the grant and the three calendar yearsthereafter less the number of citations in the same years tothe average patent with the same grant year and primaryUSPTO class. When comparing the relative citation counts,both the absolute and percentage increase in the citationcounts are as great or greater.To provide a more nuanced view of the changes in the patentcitations, we turn to a multivariate analysis. A natural startingpoint is the Poisson count model. The defining property ofour model is that, for each patent i, the individual citationevents are independently distributed over the three yearsfollowing the grant. The intensity of citations is denoted asλ i, and with this intensity, the patent receives λ i citations,on average, over the three years following the grant date.To compare these intensities before and after the buyouttransaction, we estimate a basic Poisson specification1n (λ i) = Χ í β (1)7In the USPTO data, patents are typically not cited prior to issuance. This reflects the fact that many awards are not published prior to issuance andthat the USPTO does not update its records of citations to published patent applications to include the number of the ultimately granted patents.Thus, the grant date is the beginning of the period when a patent can garner citations.8Patents are assigned during the application process to one of approximately 1,000 technology classes, as well as a more detailed subclass. Theseclassifications are important, since they are the primary way in which the USPTO identifies other relevant patents during the examination process.The Global Economic Impact of Private Equity Report 2008 Large-sample studies: Long-run investment 31