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

66 Pages Posted: 16 Jan 2025

See all articles by Run Li

Run Li

Xiamen University - School of Economics

Xiaoran Ni

Xiamen University - School of Economics; Xiamen University - Wang Yanan Institute for Studies in Economics (WISE)

David Yin

Miami University of Ohio

Date Written: January 12, 2025

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

Suggested Citation

Li, Run and Ni, Xiaoran and Yin, David, Patent Pledgeability and Corporate Tax Avoidance: Evidence from the Patent Pledge Financing Pilot Program (January 12, 2025). Available at SSRN: https://ssrn.com/abstract=5094337 or http://dx.doi.org/10.2139/ssrn.5094337

Run Li

Xiamen University - School of Economics ( email )

China

Xiaoran Ni (Contact Author)

Xiamen University - School of Economics ( email )

D204
Economic Building
Xiamen, Fujian 361005
China

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

Xiamen
China

David Yin

Miami University of Ohio ( email )

Oxford, OH 45056
United States

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