IDEAS home Printed from https://ideas.repec.org/a/spr/reaccs/v29y2024i1d10.1007_s11142-022-09712-1.html
   My bibliography  Save this article

Firm innovation and covenant tightness

Author

Listed:
  • Zhiming Ma

    (Peking University)

  • Kirill E. Novoselov

    (Shanghai University of Finance and Economics)

  • Derrald Stice

    (University of Hong Kong)

  • Yue Zhang

    (Central University of Finance and Economics)

Abstract

This study explores the association between firm innovation and loan covenant strictness. We find that lenders construct stricter contracts for firms filing more patents, consistent with lenders imposing more oversight on firms when they enter the commercialization stage after having demonstrated their inventiveness. Our results hold under propensity score matching and entropy balancing, and when exploiting the American Inventors Protection Act as a shock affecting unrelated banks’ access to patent filing information. The relationship we document is stronger when the lender has more expertise and for firms with higher default risk. We demonstrate that borrowers’ patent filings are associated with more future R&D and capital investment and with a higher likelihood of their acquiring firms in the industry of their patent filings. Our results are consistent with the theoretical prediction that lenders interpret patent filings as indicative of high inventive potential that requires stricter discipline and oversight by lenders in order to be converted into actual business success, and with them designing debt contract terms accordingly.

Suggested Citation

  • Zhiming Ma & Kirill E. Novoselov & Derrald Stice & Yue Zhang, 2024. "Firm innovation and covenant tightness," Review of Accounting Studies, Springer, vol. 29(1), pages 151-193, March.
    • Handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09712-1
    DOI: 10.1007/s11142-022-09712-1
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11142-022-09712-1
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s11142-022-09712-1?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:reaccs:v:29:y:2024:i:1:d:10.1007_s11142-022-09712-1. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.