CFGE-9: Collateral and Corporate Policy
Trademark Collateral and Debt Financing
UNSW Business School, Australia
Contrary to the conventional view that intangible assets are non-collateralizable, we document the prevalence of pledging trademarks as collateral, which is more widespread than pledging patents. Trademark collateral facilitates firms' debt financing for fixed-asset investments and employment. To isolate the role of trademark collateral, we exploit an exogenous shock to tangible assets and find that trademarks improve firms' post-shock debt financing. The effect is separate from that of patent collateral. Trademarks are pledged more often by firms experiencing more tangible asset damage and more constrained firms after the shock. These results highlight the importance of trademarks for relaxing collateral constraints.
Property Rights and Debt Financing
University of Georgia, United States of America
I examine how increasing firms’ ownership of employee patents affects debt financing. I exploit a Court of Appeals Federal Circuit ruling that increased firms’ property rights to employee patents. I find that firm ownership of patents increases firms’ total debt-to- assets ratio by 18%, which is equivalent to a $62 million increase in total debt. Firms’ residual control over patents improves pledgeability of patents as collateral, by raising firms’ incentives to make more productive and synergistic use of patents. This, in turn, leads to reduction in holdup problems, as evident from enhanced complementarity of patents and inventor-employees.
Collateral Requirements and Corporate Policy Decisions
1BI Norwegian Business School, Norway; 2Catolica Lisbon School of Business & Economics, Portugal
We study how collateral requirements affect corporate policy decisions and present evidence that challenges the trade-off theory between risk management and investment policy due to collateral constraints. We compile a novel dataset on collateral and derivative transactions for all U.S. public firms. We show that cash plays a dual role as liquidity management instrument and the main source of collateral for derivative transactions. Exploiting exogenous variation in liquidity and real estate collateral values, we show that cash-collateral constraints are binding for risk management decisions, while the decisions are unaffected by variations in real estate prices. We find a 6% reduction in hedging and a 1% reduction in cash-collateral pledged.