Patent Pledgeability and Corporate Tax Avoidance: Evidence from the Patent Pledge Financing Pilot Program

Abstract

We provide the first evidence that enhanced collateral rights can increase, rather than decrease, corporate tax avoidance. Exploiting China's Patent Pledge Financing Pilot program as a quasi-natural experiment, we show that the improved ability to pledge patents as collateral leads firms to engage in more tax avoidance through two channels. First, firms use tax savings to bridge the temporal gap between immediate innovation financing needs and the delayed benefits of pledgeability. Second, firms employ tax avoidance to offset proprietary costs arising from the transition from trade secret-based to patent-based innovation strategies that require mandatory disclosure. The effects are particularly pronounced among financially constrained firms, those with weaker innovation capabilities, and firms facing higher proprietary costs. These responses persist regardless of actual pledging activity, suggesting that the option value of future pledgeability, rather than realized pledges, drives changes in corporate financial strategy. Our findings reveal how intellectual property rights reshape corporate financial policies through their impact on both financing constraints and information disclosure costs.

Keywords: Patent pledge, Tax avoidance, Innovation financing, Information disclosure, Proprietary costs

JEL Classification: G32, G21, O34, H26, O31