Creditor Rights and Innovation: Evidence from Patent Collateral
UCLA Anderson School
November 17, 2013
I show that strong creditor rights facilitate the financing of innovation, using a novel dataset of patents pledged as collateral. I begin by showing that secured debt is an important source of financing for innovation, and that patents are an important form of collateral supporting this financing. Since 2005, over one-third of aggregate R&D expenditures are by companies that have employed their patents as collateral.Using the random timing of court decisions as a source of exogenous variation in creditor rights, I show that patenting companies raise more debt financing when they can more credibly pledge their patents as collateral. Consequently, R&D investment and patenting output also increase, as do 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 strengthen, covenants loosen, granting firms more flexibility to invest in risky projects.
Number of Pages in PDF File: 56working papers series
Date posted: April 29, 2014
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