Photo of William Mann

William Mann

Research Interests: intellectual property, corporate bankruptcy, financial contracting

Links: CV

CONTACT INFORMATION:

Phone: (205) 381-0746

Email: wmann@wharton.upenn.edu

RESEARCH PAPERS:

"Creditor Rights and Innovation: Evidence from Patent Collateral"

 I show that strong creditor rights facilitate the financing of innovation, using a novel dataset of patent collateral portfolios. I begin by showing that secured debt is an important source of financing for innovation, and that patents are an important form of collateral supporting this financing. Since 2005, approximately 35% of aggregate R&D expenditures are by companies that have employed their patents as collateral. Using the random timing of court decisions as a source of exogenous variation in creditor rights, I show that patenting companies raise more debt financing when they can more credibly pledge their patents as collateral. Consequently, R&D investment and patenting output also increase, as do the technological diversity and average citation count of the patents produced. Analysis of the debt contracts reveals that covenants and collateral act as substitutes: When creditor rights strengthen, covenants loosen, granting firms more flexibility to invest in risky projects.

(with Alex Edmans)

Most research on firm financing studies the choice between debt and equity. We model an alternative source -- non-core asset sales -- and identify three new factors that drive a firm's choice between selling assets and equity. First, equity investors own a claim to the cash raised. Since cash is certain, this mitigates the information asymmetry of equity (the ``certainty effect''). In contrast to Myers and Majluf (1984), even if non-core assets exhibit less information asymmetry, the firm issues equity if the financing need is high. This result is robust to using the cash for an uncertain investment. Second, firms can disguise the sale of a low-quality asset as instead motivated by operational reasons -- dissynergies -- and thus receive a higher price (the ``camouflage effect''). Third, selling equity implies a ``lemons'' discount for not only the equity issued but also the rest of the firm, since its value is perfectly correlated. In contrast, a lemons discount on assets need not lead to a low stock price, as the asset is not a carbon copy of the firm (the ``correlation effect'').

REFERENCES:

Professor of Finance
The Wharton School 
University of Pennsylvania
215-898-6200 
Professor of Finance
London Business School 
on leave from Wharton
(020) 7000 8258 
Assistant Professor of Finance
The Wharton School
University of Pennsylvania
215-746-0496 
Assistant Professor of Finance
The Wharton School 
University of Pennsylvania
215-898-1118