Shadow of Crisis: The Spillover Effect of Litigation on Peer Firm Innovation

Adverse events such as patent litigations generate negative repercussions for firms. At a broader level, risks of experiencing similar events also affect peer firms’ knowledge search and creation. However, such spillover effect is much less examined. This study investigates how non-litigated firms pivot their innovation strategy after patent litigation risks heighten. Specifically, we focus on litigation initiated by patent assertion entities (PAEs) that are known for suing multiple firms in the same industry. Using a staggered difference-in-differences approach, we find that litigation risks reduce the scope of non-litigated firms’ knowledge search and the quality of creation. We contribute to the literature by filling the gap of how the impact of patent litigations spreads from the focal litigant to other firms in the industry.
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