Crowd out and reduction of investments are backed by comparative studies.

Second, our results highlight the dichotomous reactions in R&D investments between defendant firms and their technology peers after NPE lawsuits. Cohen et al. (2016, 2019) show that defendant firms substantially reduce their R&D investments after NPE litigations, consistent with the notion that legal and settlement costs crowd out innovation activities at targeted firms. In contrast, our study provides large sample evidence supporting the survey evidence (e.g., Chien 2014) and theoretical predictions (Reitzig et al. 2007; Henkel and Reitz 2010) of the “chilling effects” of NPE lawsuits in that peers increase their R&D investments in response to the NPE litigation risk. Such an increase in R&D investments, however, is less efficient in generating valuable and impactful patents.

Overall, assessing the impacts of NPE litigations on different related parties is crucial to fully gauge their societal impacts. By identifying much broader wealth and real effects of NPE litigations on at-risk technology peers than what has been identified in the existing NPE litigation literature, our study could potentially inform the current regulatory and policy debate pertaining to NPEs. In particular, the insights of the study will assist policymakers in making a more thorough cost-benefit analysis with respect to NPE regulations.