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Intellectual Capital and Financing Decisions: Evidence from the U.S. Patent Data

Author

Listed:
  • Qiao Liu

    (Guanghua School of Management, Peking University, 100871 Beijing, People's Republic of China)

  • Kit Pong Wong

    (School of Economics and Finance, University of Hong Kong, Pokfulam, Hong Kong)

Abstract

This paper develops a real options model to understand two distinct roles played by intellectual capital in corporate financing decisions. Whereas limiting a firm's debt capacity because of its low liquidation value, intellectual capital enhances a firm's debt capacity through its positive impact on earnings. Our model shows that the former dominates or is dominated by the latter, depending on whether the rate of dissipation of intellectual capital upon default is larger or smaller than a critical level, respectively. Using patent-based and research-and-development-based variables as proxies for intellectual capital, we find robust evidence that the relation between intellectual capital and leverage is positive. Specifically, a one-standard-deviation increase in the level of a firm's intellectual capital is associated with an increase of 6.6% to 21.1% in its market leverage. We further find this positive relation to be stronger for biotechnology firms. This paper was accepted by Wei Xiong, finance.

Suggested Citation

  • Qiao Liu & Kit Pong Wong, 2011. "Intellectual Capital and Financing Decisions: Evidence from the U.S. Patent Data," Management Science, INFORMS, vol. 57(10), pages 1861-1878, October.
  • Handle: RePEc:inm:ormnsc:v:57:y:2011:i:10:p:1861-1878
    DOI: 10.1287/mnsc.1110.1380
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    References listed on IDEAS

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    Cited by:

    1. Teplova, T. & Sokolova, T. & Teplov, A., 2017. "Intellectual Capital of Russian Companies as a Driver of Reducing the Cost of Debt," Journal of the New Economic Association, New Economic Association, vol. 36(4), pages 107-134.
    2. Florian Ederer & Gustavo Manso, 2013. "Is Pay for Performance Detrimental to Innovation?," Management Science, INFORMS, vol. 59(7), pages 1496-1513, July.
    3. Guangchun Jin & Jian Xu, 2022. "Does Intellectual Capital Affect Financial Leverage of Chinese Agricultural Companies? Exploring the Role of Firm Profitability," Sustainability, MDPI, vol. 14(5), pages 1-14, February.
    4. Jiang, Hongxun & Fan, Shaokun & Zhang, Nan & Zhu, Bin, 2023. "Deep learning for predicting patent application outcome: The fusion of text and network embeddings," Journal of Informetrics, Elsevier, vol. 17(2).
    5. Sunghun Chung & Animesh Animesh & Kunsoo Han & Alain Pinsonneault, 2019. "Software Patents and Firm Value: A Real Options Perspective on the Role of Innovation Orientation and Environmental Uncertainty," Information Systems Research, INFORMS, vol. 30(3), pages 1073-1097, September.
    6. Farhad Shahveisi & Farshid Khairollahi & Mohammad Alipour, 2017. "Does ownership structure matter for corporate intellectual capital performance? An empirical test in the Iranian context," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 7(1), pages 67-91, April.
    7. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    8. Alimov, Azizjon, 2019. "Intellectual property rights reform and the cost of corporate debt," Journal of International Money and Finance, Elsevier, vol. 91(C), pages 195-211.

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