Debt Financing in the Knowledge Economy: Evidence from Intellectual Property as Loan Collateral

Abstract

The evolution towards an increasingly knowledge-based economy causes financing gaps worldwide, especially for intangible-rich, bank-dependent firms. This study investigates an exhaustive set of trademarks, patents, and design rights pledged as collateral in loan agreements to provide new evidence on the use of intellectual property (IP) as loan collateral. Our setting allows us to detail the relevance, implications, and determinants of IP assets for secured debt financing. In a quasi-natural experiment, we exploit exogenous variation in the menu of pledgeable assets and show that IP rights do not just serve as an add-on in the overall collateral mass but can be an integral part of loan agreements. Our analyses further disclose that firms deploy distinct IP assets as collateral, mostly trademarks. Granular IP-level analyses show that cash flow attribution is the key determinant for pledgeability irrespective of the IP type. From a managerial perspective, the findings suggest that IP collateralization is a promising strategy, widening the financing opportunities of financially constrained small firms.

Keywords: Debt financing, intellectual property, collateral assets, trademarks, patents

JEL Classification: G32; O32; O34; D23; L14