Licensing Out as a Form of Myopic Management

Résumé

In recent years, financial analysts have affected the way that managers run their businesses. The consequences of failing to meet analysts’ expectations have been so severe that managers increasingly focus on the short term, using activities that inflate current earnings at the expense of long-term firm performance. Licensing out the company’s intellectual property can be one of these short-run strategies. In this paper, we propose hypotheses that relate companies’ licensing strategy to their financial situation and present a simple microeconomic model to address this relationship. The licensing decision depends on three key elements: the probability of accomplishing analysts’ forecast; the company-competitor relative R&D productivity; and, the fixed fee-royalty licensing contract. Our model helps to explain why licensing contracts signed in a pressure situation contain a distorted payment scheme. Specifically, we find the fixed fee to be greater than optimal and the royalties to be lower than optimal, as compared to those contracts signed in a non-pressure situation.