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 construct a novel dataset of patent collateral portfolios and use it to show that stronger creditor rights facilitate the financing of innovation. I begin by showing that (1) secured debt is an important source of financing for innovation, and (2) patents are an important form of collateral supporting this financing. Since 2003, 49% of public-company R&D is performed by companies that have previously pledged their patents as collateral. Using the random timing of court decisions that strengthened the effectiveness of state property law for patents, and variation across states in the ease of seizing loan collateral, I show that patents are more likely to be pledged when it is easier to seize them as collateral. Debt issuance, R&D investment, and patenting output also increase in response, and the increased patenting output receives more citations and spans more technology categories. 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