Critical Finance Review > Vol 9 > Issue 1-2

Patents Do Not Measure Innovation Success

David M. Reeb, National University of Singapore, Singapore, , Wanli Zhao, Renmin University of China, China,
Suggested Citation
David M. Reeb and Wanli Zhao (2020), "Patents Do Not Measure Innovation Success", Critical Finance Review: Vol. 9: No. 1-2, pp 157-199.

Publication Date: 11 Jun 2020
© 2020 David M. Reeb and Wanli Zhao
Product innovationProcess innovationPatentsTrade secretsProductannouncementsInsider tradingDisclosure choiceFinancing innovation


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In this article:
1. Introduction 
2. Data, Sample, and Variables 
3. Non-Patenting Firms vs. Zero R&D Firms 
4. Non-Patenting vs. Patenting Firms 
5. Market Scrutiny and Patenting Choice 
6. Robustness Tests 
7. Concluding Remarks 
Appendix A 
Appendix B 
Appendix C. Examples of New Product Announcements 
Appendix D. Variable Definitions 


We find that a company’s patent filings and citations are not good measures of R&D success or failure, even when compared to firms in the same industry. Instead, our analysis reveals that patent counts reflect the firm’s mix of product and process innovation. Intuitively, competitor infringements of process innovation are difficult to detect, suggesting these innovations are better protected via trade secret than patents. We document that non-patenting firms frequently announce valuable new products, even though they emphasize process over product innovation. Insider trading in non-patenting firms generates positive excess returns, while such activity in patenting firms yields ordinary returns. The Uniform Trade Secrets Act induced firms to switch from patenting to non-patenting, leading to lower analysts and institutional following. Financial intermediaries potentially influence the disclosure of innovation rather than research and development success (Aghion et al., 2013; Bena et al., 2017). Overall, our tests indicate that patents and citations signify the nature of innovation rather R&D success.