We find that, when a firm is sued by non-practicing entities (NPEs), the likelihood of its technology peers being sued increases in the subsequent year. Defendants’ technology peers experience significant market value losses around the lawsuit filing date. Moreover, defendants’ technology peers respond to NPE litigation risk by increasing R&D investments to develop workaround technologies. However, the increase in R&D incrementally generates fewer patent citations or patents with lower values. Thus, our results highlight broader wealth effects and corresponding real effects of NPE-initiated litigation on defendants’ technology peers. These results provide sharp contrasts to the insignificant wealth and real impacts on defendants’ technology peers if litigations are initiated by practicing entities (PEs). The new evidence informs the current regulatory and policy debates pertaining to NPEs. Valuation Insight: Firm value is negatively affected when a technology peer firm is sued by a non-practicing entity (NPE) trolling for patent violations. The firm generally responds by increasing R&D investment to develop alternative technologies. However, this appears to be ineffective. In contrast, litigation by a practicing entity (PE) has little impact on technology peer firm value and investment decisions.

53 p. ; Includes bibliographical references (pp. 32-33) ; This draft: November 17, 2021 ; The authors appreciate the helpful comments from Jeff Callen, Jian Cao, Weili Ge, Doug Hanna, Julia Higgs, Mark Kohlbeck, Scott Liao, Hai Lu, Jody Magliolo, Filippo Mezzanotti, Partha Mohanram, Pam Murphy, Jing Pan, Maya Thevenot, Dan Thornton, Sorabh Tomar, Hamid Vakilzadeh, Aida Wahid, Mike Welker, and Franco Wong. We also thank the participants of the 2019 Conference on the Convergence of Financial and Managerial Accounting Research, the 2019 Northern Finance Association annual conference, and the participants of research workshops at Chongqing University, Florida Atlantic University, Hong Kong Baptist University, Peking University, Queen’s University, Southern Methodist University, University of Toronto, and Xiamen University. We gratefully acknowledge financial support from the Social Sciences and Humanities Research Council of Canada (SSHRC) and the General Research Grant from Smith School of Business, Queen’s University. Yu Hou is grateful for the financial support from CPA Ontario.