Patent Applications and Director Dealings

The objective of this paper is to prove the existence of abnormal returns of director dealings based on patent applications in a broader framework of indicators for the success of reported insider trading. Furthermore, the focus will be set on the role of patent importance on the actual performance of the different director dealings.

Before discussing the impact of patent applications on director dealings, the first step must be a definitional framework of the frequently used terms such as "insider trading" and "patent" which need to be placed in an economic context. Furthermore, chapter 2 explains basic principals of the two components of insider trading, namely: information asymmetry and corporate value creation. Additionally, the legal and institutional setting for insider trading and the patent application process is being discussed. Herein, the focus will lie on the reduction for information asymmetry through legal regulations.

Chapter 3 discusses indicators for and information upon which successful insider trad-ing is based. After distinguishing between the different classical information for directorial rent appropriation, the focus will lie on practically examining whether or not knowledge on imminent breakthroughs are an appropriate vehicle for insider trading. Then, the signaling effect of patent applications on imminent breakthroughs will be discussed, and the indications for a connection between patent applications and director dealings will be provided. In chapter 4 results of the empirical will be reported. The study is organized in three steps, aiming to provide evidence that with increasing patent importance, abnormal returns for related director dealings rise.