Lenders’ selection capabilities, patent quality, and the outcome of patent-backed loans

Abstract

In this paper, we investigate the phenomenon of patent collateralization by empirically focusing on the factors that affect the outcome of the collateralization process. In particular, we want to examine to what extent patent quality, lenders’ characteristics, as well as lenders’ selection capabilities (i.e. in identifying high-quality patents) affect the likelihood of observing a security interest release. We identify the patents recorded in security agreements and their release from the USPTO Patent Assignment database. The final dataset is made up of a total of 8818 security interest agreement records, involving 133,110 patents pledged as collateral for debt between 2007 and 2010. We find evidence that a security interest is more likely to be released for patents with a higher technical merit and when the lenders are more experienced and are specialty finance companies. When considering other types of lenders (i.e. banks in particular) or less experienced lenders, the positive association between the security interest release and the technical merit of the pledged patent is lower. The evidence suggests that IP-backed loans represent an effective financial channel for those firms that control valuable intangible assets and that experience and specialization allow lenders to develop better selection capabilities.

Which patents to use as loan collaterals? The role of newness of patents' external technology linkage

“…In comparison, the lender has an information disadvantage relative to the borrower in terms of whether a loan will default, and the lender bears the loss if the pledged patent cannot be liquidated. Due to these reasons, and consistent with prior research (e.g., Caviggioli et al, 2020; Fischer & Ringler, 2014; Hochberg et al, 2018), we adopt the lender's view in developing our arguments.…”

“…Even after a patent is pledged, the legal ownership of the patent and the right to use the patent, continues to be held by the borrower (i.e., the patent owner), unless the loan defaults, and the rights on the collaterals are returned to the original owner by the lender when the agreement terminates (Caviggioli, Scellato, & Ughetto, 2020; Marco, Myers, Graham, D'Agostino, & Apple, 2015). According to Caviggioli et al (2020), only about 20% of pledged patents in their sample were not (or have not been) returned to the original owner, including recent agreements that are still at risk of being released in the future and termination cases that were not reported to the United States Patent and Trademark Office (USPTO) 3 . In other words, pledging a patent does not affect the borrower's legal ownership or their right to use the patent, unless the loan defaults.…”

“…Patents are intangible assets, and their liquidity and liquidation value are difficult to assess. Scholars have gauged patents' liquidation value by looking at patents' forward citations (Fischer & Ringler, 2014; Mann, 2018), commercial quality (Fischer & Ringler, 2014), and licensing royalties (Caviggioli et al, 2020), and examine how these patent‐specific characteristics are related to the likelihood of a patent being pledged. However, as pointed out by the prior literature, it would be hard to evaluate the liquidity and liquidation value of an individual patent or its underlying invention in isolation without considering the invention space to which the focal patent belongs (Reitzig, 2004).…”

The effects of knowledge base characteristics on patent pledge financing: the moderating effects of technological munificence and dynamism

“…Whereas, patents with low knowledge breadth limit potential purchasers in specific technology industries. Thus, if a debtor that uses patents with a high knowledge breadth as collateral defaults, the creditor can find more potential purchasers, which makes it easier for creditors to liquidate the patents to reduce transaction costs and recover losses (McCarthy and Ruckman, 2017;Caviggioli et al, 2020;Mann, 2018). Consequently, we hypothesise that: H1.…”

“…Researchers found that knowledge breadth provides the ability to integrate diverse information to generate new ideas, adapt to technological changes and seize market opportunities (Boh et al , 2014). Therefore, patents with a high knowledge breadth have high strategic importance to patent owners and transactional attractiveness to potential buyers, as both are willing to exploit these resources to enhance their competitive advantage and performance (Lerner, 1994; Caviggioli et al , 2020; Katila and Ahuja, 2002). Conversely, knowledge depth captures the analytical sophistication and cognitive complexity of knowledge in key fields (Moorthy and Polley, 2010; Bierly and Chakrabarti, 1996; Zhou and Li, 2012).…”