Are patents signals for the IPO market? An EU–US comparison for the software industry

•Financial markets provide different incentives for growth-up software companies to multiply patent applications before IPO.•Patent behavior impacts the amount of cash collected at IPOs not only in the US but also in Europe.•The magnitude of the value of a signal for IPO investors changes across the US and Europe, and it is related to its scarcity.•The power of patents as signals is higher in Europe than in the US.•Patenting behavior favours principally US software companies at their IPOs.

This study investigates empirically whether patents can be signals to financial markets, thus reducing problems of asymmetric information. In particular we study how patenting behaviour impacts on the way investors perceive software firms’ growth potential through an increase in the amount invested at the initial public offering (IPO) of firms in the US and Europe. This study performs regressions on the relationship of patent applications before IPO and the amount of money collected at the IPO, while controlling other factors that may influence IPO performance. We also attempt to account for a potential source of endogeneity problems that can arise for self-selection bias and simultaneity between the number of patent applications prior to going public and the amount of money collected at IPO. We find significant and robust positive correlations between patent applications and IPO performance. The signalling power of patenting is significantly different for US and European companies, and is related to the difficulty in obtaining a signal and its scarcity. An additional patent application prior to IPO increases IPO proceeds by about 0.507% and 1.13% for US and European companies, respectively. Results suggest that a less ‘applicant friendly’ patenting system increases the credibility of patents as signals and their value for IPO investors.