Selling Innovation in Bankruptcy

Abstract

We analyze patent reallocation in Chapter 11 bankruptcies of innovative firms. Patent sales are prevalent and occur immediately after bankruptcy filing. Firms sell their core (i.e., technologically critical) patents; and this pattern concentrates in firms whose creditors have strong control rights. Creditors demand core patents as collateral ex ante and push for sales in bankruptcy. Additional tests suggest that those patents are not reallocated for more productive uses: patents sold in bankruptcy are less cited under new ownership, more likely to be purchased by patent trolls, and more likely to be separated from their inventors than those sold outside bankruptcy.

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

JEL Classification: G33, O34