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Event studies and the share-price effects of patent litigation

People have examined the stock market’s reaction to the filing of law suits, a form of research called “event studies.”  Some researchers studied the aftermath of the filing of 20 different patent infringement lawsuits between 1981 and 1983 where (i) the filing was reported in the Wall Street Journal, (ii) there was only one plaintiff and one defendant, and (iii) adequate market data existed.  In the two days after announcement of the patent lawsuit, the combined market-adjusted value of the two companies fell by an average of negative 3.1 percent.

That a patent lawsuit has such power to drop stock prices is amazing, although it may have been that the outcome of such lawsuits would be critical to at least one of the litigants.  Still, one might imagine that one party’s stock price would rise in anticipation of a favorable recovery or business-enhancing settlement.