The Use and Misuse of Patent Data: Issues for Finance and Beyond

Patents and citations are powerful tools increasingly used in financial economics (and management research more broadly) to understand innovation. Biases may result, however, from the interactions between the truncation of patents and citations and the changing composition of inventors. When aggregated at the firm level, these patent and citation biases can survive popular adjustment methods and are correlated with firm characteristics. These issues can lead to problematic inferences. We provide an actionable checklist to avoid biased inferences and also suggest machine learning as a potential new way to address these problems.