Abstract: Patent grants can create either opportunities or threats for technologically related firms, but their net effect is difficult to predict. Economic theory offers competing predictions. Knowledge spillovers imply that a focal firm’s innovation may create complementary investment opportunities for technologically related peers, whereas stronger intellectual property rights and product-market rivalry imply competitive threats that discourage follow-on innovation in the protected domain. To distinguish between these competing forces, I use abnormal stock returns around patent grant dates to classify whether markets interpret a focal firm’s patent as creating opportunities or threats for technologically related peers. I then examine how peers adjust their innovation, acquisition, and financing policies following these patent grants. I find that peers increase R&D, pursue follow-on innovation in related technological domains, and engage in technology-related acquisitions following complementary patent grants, but redirect innovation toward different technologies following rivalrous patent grants. These responses are stronger when peers possess greater absorptive capacity and financial flexibility. Legal constraints dampen expansion following complementary patent grants and intensify the redirection of innovation following rivalrous patent grants.

Abstract: Can financial incentives redirect corporate innovation toward socially valuable projects with limited commercial markets? I study the Rare Pediatric Disease Priority Review Voucher program, which provides a transferable financial reward for successful drug development. Using clinical-trial data and a difference-in-differences design, I find that the program increases public-firm participation in eligible drug development, including entry and continued investment in existing projects. The response primarily reflects an expansion of firms’ innovation portfolios rather than substitution away from other projects. These findings show that outcome-contingent financial incentives can affect both the level and direction of corporate innovation.