Intangible Capital and Leverage

Abstract

We investigate the causal effect of intangible capital on leverage. To address endogeneity, we exploit patent invalidations by the US Court of Appeals for the Federal Circuit, where judges are randomly assigned to cases. Differences in judge leniency provide exogenous variation in the probability that firms’ patents are invalidated. Using this probability as an instrument for exogenous losses in intangible capital, we find a patent invalidation leads to a 14.1% reduction in leverage, suggesting that intangible capital causally supports leverage. This local average treatment effect is stronger in firms who use patents as loan collateral, in less creditworthy and in smaller firms. The deleveraging after patent invalidation is mainly driven by firms reducing short-term debt.

Keywords: Intangible Capital, Leverage, Capital Structure, Instrumental Variable

JEL Classification: G32, G33, O34