Frivolous patent-infringement claims increase the cost of innovation for small businesses and force them to exit via premature and discounted acquisitions. This study investigates the effect of abusive patent-infringement claims by patent trolls on acquisitions of small firms. I exploit the staggered adoption of anti-patent troll laws in 35 states as a quasi-natural experiment and find that the laws have two effects on acquisitions. First, the number of acquisitions of small businesses by large firms declines after these laws are passed. Second, the anti-troll laws increase the acquisition price for large firms. I find that the market reflects the increased cost of acquisition following the passage of anti-troll laws as measured by the lower acquisition announcement returns. Moreover, I find evidence that large firms increase R&D expenditure after the adoption of state laws. Using a sample of acquisitions that are plausibly unaffected by the state laws, I disentangle alternative explanations such as local economic shocks, industry-wide changes and merger waves. Overall, the findings suggest that the anti-patent troll laws increase the value of small innovative firms.
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