In 1975 Japan expanded the scope of its patent law by introducing product patents for newly developed chemical and pharmaceutical products. We use rate‐of‐return data from the Tokyo Stock Exchange for Japanese pharmaceutical companies to examine the impact of the change in the patent law. Our empirical findings indicate that the passage of the new patent law induced an excess return of approximately 26 percent to a portfolio of large pharmaceutical companies. Companies with R&D programs specializing in new product development experienced large gains, while companies with R&D programs specializing in imitative process patents experienced no ga