Abstract:

The sharp time constraints faced by patent examiners can negatively impact the quality of patents they allowed. We measure the busyness of an examiner of a year using the number of patents approved by the examiner in the year, and find that patents approved by busier examiners have lower future citations and lead to lower profitability of innovating firms. Stock returns of firms with patents approved by busy examiners are 0.65 percent per month lower than those of firms with patents approved by nonbusy examiners. The effect of examiner busyness on stock returns is stronger for firms with higher R&D expenditures and when there is limited investor attention to patent issuance, and the effect lasts for two years without a subsequent return reversal. We rule out the risk and endogeneity explanations by exploiting the random assignment of patent examiners within art unit, and the effect of examiner busyness is not explained by examiner leniency either. Our results suggest that investors underreact to the negative causal impact of examiner busyness on patent quality and stock prices.