Lending to Innovative Firms
61 Pages Posted: 20 Sep 2013 Last revised: 23 Nov 2016
Date Written: November 20, 2016
Is bank financing compatible with innovation? We show that an exogenous enhancement in value of borrowers' patents, either through greater patent protection or creditor rights over collateral, results in cheaper loans. Using regression discontinuity design, we show while R\&D investment drops sharply following a financial covenant violation, the reduction is concentrated in firms with less productive R\&D. Consequently, R\&D reduction does not impair innovative output. Our results suggest that the property-rights that patents confer to intellectual property and lenders' judicious exercise of control rights, allows bank loans to be a viable means of financing for innovative firms.
Keywords: Bank financing, Innovation, Patents, Citations
JEL Classification: G21, O30
Suggested Citation: Suggested Citation