Selling Innovation in Bankruptcy

Abstract

We analyze patent reallocation in the bankruptcy of innovative firms. Firms sell their core (i.e., technological critical and valuable) patents in Chapter 11 reorganization. This pattern concentrates in firms whose secured creditors have strong control rights. The mechanism is that core patents are collateralized for secured borrowing ex ante, and collateralized patents are sold under creditor control in bankruptcy. Patents sold in bankruptcy are less cited under new ownership and are more likely to be purchased by patent trolls. The paper highlights the effects of financial contracting on the reorganization of bankrupt innovative firms and the diffusion of technology.

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

JEL Classification: G33, O34