Bank loan spread and private information: pending approval patents

Abstract

This study examines a specific source of lenders' ex ante information advantage, private information about borrowers' forthcoming patents. We examine this setting to provide evidence of the impact of such private information on borrowers' cost of debt. We find evidence consistent with lenders incorporating private information by charging borrowers with forthcoming patents a lower spread than borrowers that lack that private information. We document a negative association between loan spread and the citation count on forthcoming patents, consistent with borrowers providing lenders with detailed information regarding future expected cash flows from forthcoming patents and lenders responding through a reduction in interest costs for those borrowers. We also show that the reduction in loan spreads is related to the expected value of the forthcoming patent and is greater for borrowers with higher initial information uncertainty and default risk, and when the lead lender has greater loan concentration in the borrower's industry. Our results suggest that forthcoming patents are a significant source of private information useful to borrowers and employed by lenders.

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

“…We do not find that the effect of patenting activity is different for borrowers with greater initial information uncertainty. This result is consistent with Plumlee et al's () finding that for borrowers with greater initial information uncertainty, only the quality of patenting activity as measured by patent citation count is associated with a lower cost of debt, while the mere presence of patenting activity is not. Next, we identify borrowers with a greater initial default risk ( High Default Risk D ) as those with an Altman's () Z ‐score at or below the 25th percentile.…”

“…Inspired by Plumlee et al (), we also examine whether the relationship between innovative firms' cost of debt and patenting activity is stronger for borrowers with a greater initial information uncertainty regarding future cash flows or a greater initial default risk. We identify borrowers with a greater initial information uncertainty as those who are unrated ( High Information Uncertainty D ) and extend our regressions by including interaction effects between High Information Uncertainty D and our patent proxies .…”

“…Although beyond the scope of the current paper, one such relevant factor could be the quality of a firm's patenting activity as measured by its patent citation count (see, e.g. Plumlee et al ).…”

“…We examine the effect of innovation disclosure on the cost of debt for firms in five innovative industries, which are characterized by high patenting propensities relative to most other industries (Mansfield ), and which have been the focus of prior research (Plumlee et al ). In particular, we examine chemicals and allied products (Standard Industrial Classification (SIC) 28), industrial and commercial machinery and computer equipment (SIC 35), electronics and communications (SIC 36), transportation equipment (SIC 37), and instruments and related products (SIC 38).…”

Do Managers Use Meeting Analyst Forecasts to Signal Private Information? Evidence from Patent Citations

“…We also contribute to the literature by introducing a unique dataset to the accounting literature that proxies for managers’ private information about the underlying value of firm patents. Data on patents under application offer opportunities for researchers to study how various stakeholders communicate and use private information (Plumlee et al., ).…”