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Intangible Capital and Leverage

Published online by Cambridge University Press:  12 February 2020

Philipp Horsch ,
Philip Longoni  and
David Oesch
Philipp Horsch
Affiliation:
Horsch, philipp24h@gmail.com, a global management consulting firm
Philip Longoni
Affiliation:
Longoni, philip.longoni@business.uzh.ch, University of Zurich Department of Business Administration
David Oesch*
Affiliation:
Oesch, david.oesch@business.uzh.ch, University of Zurich Department of Business Administration
*
Oesch (corresponding author), david.oesch@business.uzh.ch
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Abstract

We investigate the causal effect of intangible capital on leverage. To address endogeneity, we exploit patent invalidations by a U.S. court in which judges are randomly assigned to cases. Differences in judge leniency provide exogenous variation in the probability that firms’ patents are invalidated. Using this probability as an instrument for exogenous losses in intangible capital, we find a patent invalidation leads to a 14.1% reduction in leverage, suggesting that intangible capital causally supports leverage. This local average treatment effect is stronger in firms that use patents as loan collateral and in less creditworthy as well as smaller firms.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 2 , March 2021 , pp. 475 - 498
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2020

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Footnotes

We thank an anonymous referee, Andrea Bafundi, Constantin Charles, Jenny Chu, Ettore Croci (discussant), Günther Franke, Jasmin Gider, Xavier Giroud, María Gutiérrez Urtiaga, Michel Habib, Luzi Hail, Jens Jackwerth, Axel Kind, Anja Kunzmann (discussant), Christian Leuz, Paulo Maduro, Paul Malatesta (the editor), Alberto Manconi, Evita Paraskevopoulou, Stephen Penman, Gaétan de Rassenfosse, Pablo Ruiz Verdú, Zacharias Sautner, Markus Schmid, Anna Toldrà Simats, Josep Tribó, Felix Urban, Alexander Wagner; seminar participants at the Carlos III University of Madrid (UC3M), the University of Konstanz, and the University of Zurich; and conference participants at the 2018 FMA European Conference and at the 2017 Annual Conference of the Swiss Society for Financial Market Research for helpful discussions and valuable comments. This paper is part of Longoni’s doctoral dissertation at the University of Zurich. Parts of this paper were written while Horsch was at the University of St. Gallen and a visiting PhD student at New York University and while Longoni was a visiting PhD student at Columbia University. Horsch and Longoni thankfully acknowledge financial support from the Swiss National Science Foundation.

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