Innovation under regulation: examining the interplay of regulation and market forces in thepatent and spac landscapes

Regulatory interventions are often implemented to address inefficiencies and protectmarket participants. However, such policies can also generate unintended consequences,necessitating a thorough evaluation of their net impact. This thesis investigatesthe multifaceted impact of two distinct regulatory interventions regardinginnovative technologies on their respective markets: the America Invents Act (AIA)of 2011, a landmark reform to the U.S. patent system, and the initial regulationsregarding Special Purpose Acquisition Companies (SPACs), an innovative approachto traditional Initial Public Offerings (IPO), enacted in 2021.The AIA, the most significant U.S. innovation market regulation since 1953, fundamentallyaltered the patent landscape, inducing a potential shift towards a marketcharacterized by less cooperation and more competition. This thesis examines theimpact of these changes on both the innovation acquisition market and the internalinnovation market. Acknowledging the vital link between the merger and acquisition(M&A) market and innovation, Chapter 1 investigates the impact of the AIA’sfundamental changes on innovation acquisition. Our findings reveal heightened activityin the innovation acquisition market, evidenced by a significant increase inthe number of acquired patents, even when accounting for the overall changes in the patenting landscape post-AIA. The observed surge in demand for innovation acquisitioncoincides with a decline in R&D investments and patenting activities amongacquirers. Furthermore, acquirers of innovative targets decrease their innovativeactivities following the acquisition, suggesting a potential substitution relationshipbetween the patenting market and the innovation acquisition market under the influenceof post-AIA landscape. Notably, more significant innovation outputs attractmultiple bidders, with longer deal completion times and significantly higher bidpremia paid for these targets post-AIA, suggesting that the AIA’s shift towardscompetition may be the primary culprit of the observed effects in the acquisitionmarket. We also find some supply-side evidence where the number of firms availablein the patenting market experiences a sharp decrease following AIA, potentiallyleading to supply-side constraints within the innovation acquisition market.Chapter 2 further investigates the AIA’s impact on the internal innovation market,analyzing its effect on the overall patenting landscape. Our findings reveal a declinein the growth rate of aggregate patent applications following the AIA, potentiallyjeopardizing future innovation. This decrease is further confirmed at the firm level,with a reduction in overall patenting activity by U.S. public firms and a decreasein the number of high-quality patents granted. The AIA’s impact varies across firmsizes: smaller firms appear disproportionately affected, with some being pushedout of the market altogether. Smaller-to-medium sized firms, however, may haveadapted by prioritizing quality over quantity, exhibiting a relative increase in highqualitypatents compared to other size categories. Larger firms, on the other hand,show a trend of increased patenting activity coupled with a decrease in patent quality,potentially prioritizing quantity over quality to maintain market share. Thesefindings highlight the complex and multifaceted impact of the AIA on the patentingmarket. The observed decline in patenting activity and quality necessitates furtherinvestigation to understand the potential long-term consequences for U.S. innovationand competitiveness.In the last chapter, we investigate the effect of the first regulatory event in the scopeof Special Purpose Acquisition Companies (SPACs) in 2021, a financial innovationwhich is an alternative way of taking firms public. In that sense, it is considered tobe an alternative to the conventional Initial Public Offerings (IPOs). Since SPACswere initially perceived as benefiting from a regulatory gap, this study investigateswhether the initial regulatory intervention resulted in negative market reactionsfor SPACs. Contrary to our initial hypothesis, the findings reveal no significantnegative impact on SPAC performance following the SEC announcement. However,the analysis uncovers certain SPAC characteristics that negatively affect returnsin a multivariate setting. Despite the regulations targeting warrant accounting,the study finds that offering warrants in SPAC units actually positively impactsannouncement returns.