Lending to Innovative Firms

61 Pages Posted: 20 Sep 2013 Last revised: 23 Nov 2016

See all articles by Sudheer Chava

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 20, 2016

Abstract

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

Chava, Sudheer and Nanda, Vikram K. and Xiao, Steven Chong, Lending to Innovative Firms (November 20, 2016). Available at SSRN: https://ssrn.com/abstract=2327910 or http://dx.doi.org/10.2139/ssrn.2327910

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Steven Chong Xiao (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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