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Creditor Rights and Innovation: Evidence from Patent Collateral

William Mann

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.

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Date posted: April 29, 2014  

Suggested Citation

Mann, William, Creditor Rights and Innovation: Evidence from Patent Collateral (November 17, 2013). Available at SSRN: http://ssrn.com/abstract=2356015 or http://dx.doi.org/10.2139/ssrn.2356015

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William Mann (Contact Author)
UCLA Anderson School ( email )
United States
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