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Research Abstracts Online
January 2010 - March 2011

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University of St. Thomas
College of Business
Department of Finance

PI: Mufaddal Baxamusa

The Dark Side of Patenting: Vanity; Why Do Firms Buy Vintage Technology?

This researcher has used MSI resources for two projects during this period. The first used high-frequency data to empirically test whether the number of patents increases the firm value. If the number of patents is inherently good as it signifies future profitable technology, then one should expect a positive relationship between the number of patents and firm value. On the other hand, if the number of patents is a manifestation of agency costs like vanity, then one should observe a negative relationship between firm value and the number of patents. Small sample results suggest that the number of patents has a negative relationship to firm value, while the number of abnormal citations has a positive relationship with firm value. This research then investigated the mechanism by which this value or agency cost is transmitted to the firm value. The small sample results suggest that CEOs with weaker incentives indulge in patenting while CEOs with stronger incentives patent selectively. This project is important as it has policy implications about patenting laws, innovation, and economic development.

The second project involves the choice firms make when they need additional technology: they can purchase either new technology or vintage technology. The literature that attempts to answer why firms buy vintage technology can be broadly classified into two strands. The first strand explains this choice based on expected change in technology: that the decision to induct new technology today may be affected by an expectation that a new and more efficient substitute technology will be introduced tomorrow. Other reasons for not adopting the new technology is that each adoption of new technology leads to disruption either through learning-by-doing or a gestation lag. These disruptions are costly and the firm may decide to wait for the expected forthcoming significant improvement. The second strand explains this choice through the financial constraint of the acquirer. New technology has a large upfront cost, while older technology has costs staggered in time (i.e. maintenance, downtime, etc.), so firms that cannot pay the upfront cost prefer to buy vintage technology. This computationally intensive project uses MSI resources including SAS and STATA.