Asset Pledgeability and Firm Innovation

Abstract

We examine the effect of debt financing capacity on firm innovation by employing a shock that increases firms’ asset pledgeability. We find that firms increase their innovation activities after the shock, and the increase is greater in regions with more effective enforcement and in firms with more tangible assets, even after using a matching firm analysis. We also find that firms with more tangible assets are associated with a higher level of bank loans after legal enactments. After using three instrumental variables, we find that the increase in innovation is stronger in firms with higher market tangibility.

Keywords: Asset pledgeability, Financing Capacity, Collateral, Patent

JEL Classification: G31, G33