Creditor Rights and Innovation: Evidence from Patent Collateral
UCLA Anderson School
December 1, 2014
Using a novel dataset of patents pledged as collateral, I show that strong creditor rights facilitate the financing of innovation. I first show that patents are an important form of collateral for financing investment by innovative firms: In the United States in 2013, 40% of patenting firms had pledged their patents as collateral at some point, and these firms performed 28% of aggregate R&D and received 22% of patents granted. Using the random timing of court decisions as a source of exogenous variation in creditor rights, I further show that patenting companies raised more debt financing when they could more credibly pledge their patents as collateral. Consequently, investment and patenting output also increased, as did the technological diversity and average citation count of the patents produced. Analysis of the debt contracts reveals that covenants and collateral act as substitutes: When creditor rights strengthened, covenants loosened, granting firms more flexibility in their investments.
Number of Pages in PDF File: 53
Date posted: April 29, 2014 ; Last revised: December 1, 2014
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