The American Inventors Protection Act: A Natural Experiment on Innovation Disclosure and the Cost of Debt

• Author: Nagihan Mimiroglu,Joost M. E. Pennings,Stefanie Kleimeier,Arvid O. I. Hoffmann
• DOI: http://doi.org/10.1111/irfi.12174
• Published date: 01 September 2019
• Date: 01 September 2019

The American Inventors Protection

Act: A Natural Experiment on

Innovation Disclosure and the Cost

of Debt

ARVID O. I. HOFFMANN

†

,STEFANIE KLEIMEIER

‡,§,¶

,NAGIHAN MIMIROGLU

‡

AND JOOST M. E. PENNINGS

‡,k

†

Adelaide Business School, University of Adelaide, Adelaide, Australia

‡

Department of Finance, School of Business and Economics, Maastricht University,

Maastricht, The Netherlands

§

Department of Accounting and Finance, Faculty of Management, Science &

Technology, Open Universiteit, Heerlen, The Netherlands

¶

University of Stellenbosch Business School, Bellville, South Africa and

k

Department of Social Sciences, Wageningen University, Wageningen, The Netherlands

ABSTRACT

We examine the impact of innovation disclosure through patenting on firms’

cost of debt, focusing on the American Inventors Protection Act (AIPA) as an

exogenous shock in innovation disclosure regulation. Post-AIPA, firms have an

incentive to apply for patents only if commercial success is likely. Accordingly,

we expect post-AIPA patents to be a better proxy for successful innovation activ-

ity, and thus to have a stronger effect on reducing the cost of debt than pre-

AIPA patents. Indeed, we find that pre-AIPA patents reduce the cost of debt only

for the most innovative firms, while post-AIPA, this effect holds for all firms.

JEL Codes: G21; G32; O32; O38

Accepted: 18 December 2017

I. INTRODUCTION

We assess the effect of patenting activity on reducing innovative firms’cost of

debt. Financing innovation by debt is inherently complex. First, innovative

firms’assets have lower collateral value, as they are more dependent on intangi-

bles, such as patents and human capital (Hall 2010). Second, it is difficult to

value innovative firms due to cash-flow volatility. That is, it is difficult to evalu-

ate whether patent applications will be successful and generate cash flows.

A growing body of academic literature suggests that bank financing is an impor-

tant source of external capital for innovative firms (Kerr and Nanda 2015). In the

context of bank financing, the risk of innovation failure and the uncertainty of

R&D investment payoffs are potential sources of asymmetric information

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 19:3, 2019: pp. 641–651

DOI: 10.1111/irfi.12174