Lauren Cohen

The Small World of Investing: Board Connections and Mutual Fund Returns

This paper uses social networks to identify information transfer in security markets. We focus on connections between mutual fund managers and corporate board members via shared education networks. We find that portfolio managers place larger bets on connected firms and perform significantly better on these holdings relative to their nonconnected holdings. A replicating portfolio of connected stocks outperforms nonconnected stocks by up to 7.8 percent per year. Returns are concentrated around corporate news announcements, consistent with portfolio managers gaining an informational advantage through the education networks. Our results suggest that social networks may be important mechanisms for information flow into asset prices.

Patent Trolls: Evidence from Targeted Firms

We develop a theoretical model of, and provide the first large-sample evidence on, the behavior and impact of non-practicing entities (NPEs) in the intellectual property space. Our model shows that NPE litigation can reduce infringement and support small inventors. However, the model also shows that as NPEs become effective at bringing frivolous lawsuits, the resulting defense costs inefficiently crowd out firms that, absent NPEs, would produce welfare-enhancing innovations without engaging in infringement. Our empirical analysis shows that on average, NPEs behave as opportunistic patent trolls. NPEs sue cash-rich firms ― a one standard deviation increase in cash holdings roughly doubles a firms chance of being targeted by NPE litigation. We find moreover that NPEs target cash unrelated to the alleged infringement at essentially the same frequency as they target cash related to the alleged infringement. By contrast, cash is neither a key driver of intellectual property lawsuits by practicing entities (e.g., IBM and Intel), nor of any other type of litigation against firms. We find further suggestive evidence of NPE opportunism, such as forum shopping and targeting of firms that have reduced ability to defend themselves against litigation. We find that NPE litigation has a real negative impact on innovation at targeted firms: firms substantially reduce their innovative activity after settling with NPEs (or losing to them in court). Moreover, we neither find any markers of significant NPE pass-through to end innovators, nor of a positive impact of NPEs on innovation in the industries in which they are most prevalent.

The growing problem of patent trolling

Cash-hungry patent trolls are squelching innovation—and should be screened out The last decade has seen a sharp rise in patent litigation in the United States; 2015 has one of the highest patent lawsuit counts on record (1). In theory, this could reflect growth in commercialization of technology and innovation—lawsuits increase as more firms turn to intellectual property (IP) protection to safeguard their competitive advantages. However, the majority of recent patent litigation is driven by nonpracticing entities (NPEs), firms that generate no products but amass patent portfolios for the sake of “enforcing” IP rights (2). We discuss new, large-sample evidence adding to a growing literature (3–7) that suggests that NPEs—in particular, large patent aggregators—on average, act as “patent trolls,” suing cash-rich firms seemingly irrespective of actual patent infringement. This has a negative impact on innovation activity at targeted firms. These results suggest a need to change U.S. IP policy, particularly to screen out trolling early in the litigation process.

Resident Networks and Corporate Connections: Evidence from World War II Internment Camps

Using customs and port authority data, we show that firms are significantly more likely to trade with countries that have a large resident population near their firm headquarters, and that these connected trades are their most valuable international trades. Using the formation of World War II Japanese Internment Camps to isolate exogenous shocks to local ethnic populations, we identify a causal link between local networks and firm trade. Firms are also more likely to acquire target firms, and report increased segment sales, in connected countries. Our results point to a surprisingly large role of immigrants as economic conduits for firms.

Who Chooses Board Members

We exploit a recent regulation passed by the US Securities and Exchange Commission (SEC) to explore the nomination of board members to US publicly traded firms. In particular, we focus on firms’ use of executive search firms versus simply giving choice rights to internal members (oftentimes simply the CEO), in nominating the new directors to serve on the board of directors. We show that companies that use search firms to find their board members pay their CEOs significantly higher salaries and significantly higher total compensations. Further, companies with search firm directors are significantly less likely to fire their CEOs following negative performance. In addition, we find that companies with search firm directors are significantly more likely to engage in mergers and acquisitions, and see abnormally low returns from this M&A activity (CEO compensation and monitoring along with acquisition strategy being perhaps the most attributable to board decision-making). We then instrument the endogenous choice of using an executive search when choosing directors through the varying geographic distance of companies to executive search firms. Using this IV framework, we show search firm directors’ negative impact on firm performance, consistent with firm behavior and governance consequences we also document.

IQ from IP: Simplifying Search in Portfolio Choice

Using a novel database that tracks web traffic on the SEC’s EDGAR server between 2004 and 2015, we show that institutional investors gather information on a very particular subset of firms and insiders, and their surveillance is very persistent over time. This tracking behavior has powerful implications for their portfolio choice, and its information content. An institution that downloaded an insider-trading filing by a given firm last quarter increases its likelihood of downloading an insider-trading filing on the same firm by more than 41.3% this quarter. Moreover, the average tracked stock that an institution buys generates annualized alphas of over 12% relative to the purchase of an average non-tracked stock. We find that institutional managers tend to track members of the top management teams of firms (CEOs, CFOs, Presidents, and Board Chairs), and tend to share educational and location-based commonalities with the specific insiders they choose to follow. Collectively, our results suggest that the information in tracked trades is important for fundamental firm value and is only revealed following the information-rich dual trading by insiders and linked institutions.

Reply: Do Powerful Politicians Really Cause Corporate Downsizing?

We first want to say that we believe the close examination of the methodology and robustness of published studies is absolutely necessary in our profession. We commend Snyder and Welch for their effort in following up with the data and code we posted on our sites and for investigating the questions explored in our paper in this Journal (Cohen, Coval, and Malloy 2011). We have had an engaging conversation with them for the past few years and we have enjoyed it. This having been said, we still donot agreewith the analysis, inferences, and conclusions of Snyder and Welch’s comment. Indeed, their concerns have prompted us to carry out a large amount of additional analysis—including a number of tests that address critiques that have since been dropped from the current version of their paper—that has only strengthened our confidence in our results. Themain tables of our origi-

The growing problem of patent trolling: Cash-hungry patent trolls are squelching innovation - And should be screened out

Cash-hungry patent trolls are squelching innovation—and should be screened out The last decade has seen a sharp rise in patent litigation in the United States; 2015 has one of the highest patent lawsuit counts on record (1). In theory, this could reflect growth in commercialization of technology and innovation—lawsuits increase as more firms turn to intellectual property (IP) protection to safeguard their competitive advantages. However, the majority of recent patent litigation is driven by nonpracticing entities (NPEs), firms that generate no products but amass patent portfolios for the sake of “enforcing” IP rights (2). We discuss new, large-sample evidence adding to a growing literature (3–7) that suggests that NPEs—in particular, large patent aggregators—on average, act as “patent trolls,” suing cash-rich firms seemingly irrespective of actual patent infringement. This has a negative impact on innovation activity at targeted firms. These results suggest a need to change U.S. IP policy, particularly to screen out trolling early in the litigation process.

INTELLECTUAL PROPERTY AND INNOVATION. The growing problem of patent trolling.

Cash-hungry patent trolls are squelching innovation—and should be screened out The last decade has seen a sharp rise in patent litigation in the United States; 2015 has one of the highest patent lawsuit counts on record (1). In theory, this could reflect growth in commercialization of technology and innovation—lawsuits increase as more firms turn to intellectual property (IP) protection to safeguard their competitive advantages. However, the majority of recent patent litigation is driven by nonpracticing entities (NPEs), firms that generate no products but amass patent portfolios for the sake of “enforcing” IP rights (2). We discuss new, large-sample evidence adding to a growing literature (3–7) that suggests that NPEs—in particular, large patent aggregators—on average, act as “patent trolls,” suing cash-rich firms seemingly irrespective of actual patent infringement. This has a negative impact on innovation activity at targeted firms. These results suggest a need to change U.S. IP policy, particularly to screen out trolling early in the litigation process.