Intellectual Property Rights and Debt Financing

I examine how the investment and financing of innovation are affected by the contractual allocation of intellectual property rights using a Federal Circuit ruling that strengthened firms’ property rights to employee patents. I find that treatment firms’ total debt-to-assets ratio and R&D spending increase by 18% and 9%, respectively, as the residual control over patents increases firms’ incentives to innovate. These effects are more pronounced when ex ante holdup exposure is high. Furthermore, I find a positive marginal effect of asset complementarity as it limits the decline in employee incentives. Consistently, I show that firms’ ex post asset complementarity improves.