Selling Innovation in Bankruptcy

Abstract

This article provides the first empirical investigation of the facts and economics of innovation reallocation in corporate bankruptcy. We compile a comprehensive data set of US Chapter 11 filings, USPTO patent transaction documents, and US court records on asset sales. We document that patent sales in bankruptcy are pervasive, immediate, and front-loaded in asset reallocations. Firms sell patents that are more liquid--as opposed to selling underexploited or peripheral patents. The effect is driven by firms that suffer financial (but not economic) distress, experience industry-wide distress, and have no access to external financing. Bankrupt firms selling innovation tend to retain inventors and continue to cite the sold patents after the sale. The results are consistent with the view that bankrupt firms sell innovation to satisfy imminent financing needs, as opposed to redeploying underexploited innovation for asset restructuring.

Keywords: Bankruptcy, Innovation, Patent, Asset Allocation, Liquidity, Fire Sale

JEL Classification: G33, O34