How Does Private Firm Patenting Affect Anti-Takeover Provisions in Corporate Charters? Evidence from Initial Public Offerings

Using patent examiner leniency as an instrument, we conduct an IV analysis showing that f irms with a larger number (and higher quality) pre-IPO patenting incorporate a larger number and stronger ATPs in their corporate charters at IPO. We examine two mechanisms through which pre-IPO patenting may affect the number and strength of ATPs in corporate charters: a “management entrenchment” mechanism, where ATPs merely entrench firm managers post-IPO; and a “long-run value creation” mechanism, through which ATPs incentivize the firm’s top managers to create long-run value for the firm by allowing them more time to create such value without losing control of the firm to rival management teams in the interim. We present two pieces of evidence which suggest that the long-run value creation mechanism dominates the entrenchment mechanism as an explanation for the relation between pre-IPO patenting and ATPs for our sample firms with greater pre-IPO patenting.