Managing Innovation: The Role of Collateral
51 Pages Posted: 5 Apr 2017 Last revised: 7 Apr 2017
Date Written: March 24, 2017
Using exogenous variations in the market value of firms’ real estate assets caused by fluctuations in local commercial real estate prices, I study how collateral shocks impact corporate innovation. I find evidence that collateral shocks change the quantity, quality, and trajectory of innovation. Specifically, I find that (1) an increase in collateral value leads to more patent filings, especially in industries different from the parent firm, with each patent receiving higher citations on average, (2) in response to collateral shocks, firms restructure their innovation strategies through multiple channels, including internal research and development (R&D), the acquisition of innovative targets, and corporation venture capital (CVC) investment — equity investment in start-ups by incumbent firms, and (3) the effect of collateral shocks on innovation is more pronounced for firms that are ex ante credit constrained but is mitigated if firms are located in metropolitan statistical area (MSA) areas with high local real estate price volatility.
Keywords: innovation, real estate, collateral, debt contract
JEL Classification: O31, O32, G34, G24, R30
Suggested Citation: Suggested Citation