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Lending to Innovative Firms

Sudheer Chava, Vikram Nanda and Steven Chong Xiao

Review of Corporate Finance Studies, 2017, vol. 6, issue 2, 234-289

Abstract: Is bank financing compatible with innovation? We show that an exogenous enhancement in the value of borrowers’ patents, either through greater patent protection or creditor rights over collateral, results in cheaper loans. Using regression discontinuity design, we show that although R&D investment sharply drops following a financial covenant violation, the reduction is concentrated in firms with less productive R&D. Consequently, R&D reduction does not impair innovative output. Our results suggest that the property rights that patents confer to intellectual property and to lenders’ judicious exercise of control rights allow bank loans to be a viable means of financing for innovative firms.

JEL-codes: G21 G30 (search for similar items in EconPapers)
Date: 2017
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