Patent Thickets, Stock Returns, and Conditional CAPM

Patent thickets, a phenomenon of fragmented ownership of overlapping patent rights, hamper firms’ commercialization of patents and thus deliver asset pricing implications. We show that firms with deeper patent thickets are involved in more patent litigations, launch fewer new products, and become less profitable in the future. These firms are also associated with lower subsequent stock returns, which can be explained by a conditional Capital Asset Pricing Model (CAPM) based on a general equilibrium model that features heterogeneous market betas conditional on time-varying aggregate productivity. This explanation is supported by further evidence from factor regressions and stochastic discount factor tests. This paper was accepted by Karl Diether, finance. Funding: This work was supported by the National Natural Science Foundation of China [Grant 72003206], the E.SUNAcademic Award, fromtheMinistry of Education in Taiwan [MOE110J0321Q2], and the Ministry of Science and Technology in Taiwan [MOST109-2628-E-004-001-MY3 and MOST109-2628-H-007-001-MY4]. Supplemental Material: The data files and online appendix are available at https://doi.org/10.1287/mnsc.2021.4229 .