PhD Dissertation- Merve Meriç Yılmaz
INNOVATION UNDER REGULATION: EXAMINING THE INTERPLAY OF REGULATION AND MARKET FORCES IN THE PATENT AND SPAC LANDSCAPES
Dissertation Supervisor: Prof. Serif Aziz Simsir
Ph.D. in Management, July 2024
Date & Time: Tuesday, July 23rd, 2024- 11:00 am
Place: SBS 1127 Meeting Room
Abstract:
Regulatory interventions are often implemented to address inefficiencies and protect market participants. However, such policies can also generate unintended conse quences, necessitating a thorough evaluation of their net impact. This thesis inves tigates the multifaceted impact of two distinct regulatory interventions regarding innovative technologies on their respective markets: the America Invents Act (AIA) of 2011, a landmark reform to the U.S. patent system, and the initial regulations regarding Special Purpose Acquisition Companies (SPACs), an innovative approach to traditional Initial Public Offerings (IPO), enacted in 2021.
The AIA, the most significant U.S. innovation market regulation since 1953, funda mentally altered the patent landscape, inducing a potential shift towards a market characterized by less cooperation and more competition. This thesis examines the impact of these changes on both the innovation acquisition market and the internal innovation market. Acknowledging the vital link between the merger and acquisi tion (M&A) market and innovation, Chapter 1 investigates the impact of the AIA’s fundamental changes on innovation acquisition. Our findings reveal heightened ac tivity in the innovation acquisition market, evidenced by a significant increase in the number of acquired patents, even when accounting for the overall changes in the iv patenting landscape post-AIA. The observed surge in demand for innovation acqui sition coincides with a decline in R&D investments and patenting activities among acquirers. Furthermore, acquirers of innovative targets decrease their innovative activities following the acquisition, suggesting a potential substitution relationship between the patenting market and the innovation acquisition market under the in f luence of post-AIA landscape. Notably, more significant innovation outputs attract multiple bidders, with longer deal completion times and significantly higher bid premia paid for these targets post-AIA, suggesting that the AIA’s shift towards competition may be the primary culprit of the observed effects in the acquisition market. We also find some supply-side evidence where the number of firms avail able in the patenting market experiences a sharp decrease following AIA, potentially leading to supply-side constraints within the innovation acquisition market.
Chapter 2 further investigates the AIA’s impact on the internal innovation market, analyzing its effect on the overall patenting landscape. Our findings reveal a decline in the growth rate of aggregate patent applications following the AIA, potentially jeopardizing future innovation. This decrease is further confirmed at the firm level, with a reduction in overall patenting activity by U.S. public firms and a decrease in the number of high-quality patents granted. The AIA’s impact varies across firm sizes: smaller firms appear disproportionately affected, with some being pushed out of the market altogether. Smaller-to-medium sized firms, however, may have adapted by prioritizing quality over quantity, exhibiting a relative increase in high quality patents compared to other size categories. Larger firms, on the other hand, show a trend of increased patenting activity coupled with a decrease in patent qual ity, potentially prioritizing quantity over quality to maintain market share. These findings highlight the complex and multifaceted impact of the AIA on the patenting market. The observed decline in patenting activity and quality necessitates further investigation to understand the potential long-term consequences for U.S. innovation and competitiveness.
In the last chapter, we investigate the effect of the first regulatory event regarding Special Purpose Acquisition Companies (SPACs) in 2021, a financial innovation which is an alternative way of taking firms public. In that sense, it is considered to be an alternative to traditional Initial Public Offerings (IPOs). Since SPACs were initially perceived as benefiting from a regulatory gap, this study investigates whether the initial regulatory intervention resulted in negative market reactions for SPACs. Contrary to our initial hypothesis, the findings reveal no significant negative impact on SPAC performance following the SEC announcement. However, the analysis uncovers certain SPAC characteristics that negatively affect returns in a multivariate setting. Despite the regulations targeting warrant accounting, the study finds that offering warrants in SPAC units actually positively impacts announcement returns