When your friend takes a fall: Spillovers of patent infringement lawsuits on firm innovation via cross-owners

Patent infringement lawsuits profoundly affect firms' innovation decisions, but few studies explore its spillover effects. In this paper we examine whether patent infringement lawsuits affect innovation of firms not involved but sharing cross-owners with the involved. Using the PSM-DID method and Chinese A-share listed firms’ data from 2009 to 2020, we find that after sued cross-held firms encounter patent infringement lawsuits, uninvolved focal firms increase innovation investment significantly. Information transmission from cross-owners is the important mechanism. Additionally, when sued cross-held firms and uninvolved focal firms belong to the same dialect region, industry, or uninvolved focal firms are non-SOEs, the innovation spillovers of patent infringement lawsuits are more obvious. Finally, we show that after uninvolved focal firms promote innovation input, their current and future innovation output goes up as well. Our study reveals the innovation spillovers of patent infringement lawsuits and expands research on inter-firm interaction through cross-owners.