Selling Innovation in Bankruptcy

Abstract

We analyze innovation reallocation in Chapter 11 bankruptcies of innovative firms. Patent sales in bankruptcy are prevalent and occur immediately after filing. Firms sell their core (i.e., technologically critical to the business), rather than their peripheral innovation. The selling pattern concentrates in firms with strong control of creditors, who demand core and high-quality patents as collateral ex ante. Patents sold in bankruptcy receive decreased citations post-sales, have a higher probability of patent troll purchases, and are more likely to separate with inventors. The evidence highlights the incompatibility between creditor control and innovation, which makes innovative firms vulnerable in corporate bankruptcy.

Keywords: Bankruptcy, Innovation, Asset Allocation, Creditor Control, 363

JEL Classification: G33, O34