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The Effect of Litigation Risk on Firm Investment: Evidence from a Natural Experiment

This paper investigates the effects of litigation risk on firms' investment decisions by comparing the investment activity of firms that win an Inter Partes Review (IPR) with firms that lose an IPR. Judges' validation rates are used as instruments for IPR results. To further rule out alternative explanations, I use a law change in 2017 as a natural experiment. Using a novel database, I find increasing litigation risk leads to a 20% increase in investment. Empirical evidence supports the agency conflict hypothesis and the hypothesis that firms increase investment as a signal to gain bargaining power in the settlement phase.