Impact of Patent Signal on Firm's Performance at IPO: An Empirical Analysis of Japanese Firms

This study investigates whether patents can be a useful signaling tool for the IPO performances among high- and low-tech firms. Literature has provided a wealth of evidence confirming a significant relationship between patent signal and capital-raising success for US and EU venture capital-backed firms and start-ups in specific industries. Therefore, this paper focuses on the IPO firms from a more risk-averse market, Japan, to fill in the gaps in the literature, examining the signaling effect of patent applications prior to initial public offering (IPO) to the amount raised at IPO. Moreover, we examine whether patent applications prior to IPO from high-tech have relatively weaker signaling effects to compare with low-tech IPOs. Using the OLS model for 338 Japanese IPOs listed between 2000 and 2015, the result shows a robust and positive association between the number of patents before an IPO and the amount of cash raised during the IPO. The finding confirms that patents are a reliable signal for IPOs in the Japanese context. Using OECD industry categorization to classify high-tech and low-tech IPOs, our OLS result found that the interaction impact between the high-tech dummy and the quantity of patent applications before IPO is significantly negative to the amount of cash generated at IPO. The findings hold for a new set of high-tech and low-tech firms when we used a new industrial categorization proposed by Thomson Reuters, leading us to conclude that for the Japanese companies that belong to the high-tech industry sector, patenting activities fail to have a positive signal for the IPO.