While earlier studies have suggested that patent pledging as collateral for loans can mitigate borrowing firms’ financial constraint, recent work begins to examine how patent pledge may also affect firm strategies. Joining this stream of literature, our study focuses on the impact of patent pledge on firms’ subsequent innovation strategy. We argue that because borrowing firms are under the pressure to generate more immediate cash flows to meet payment obligations, they engage less in generating new inventions. Using a sample of U.S. listed firms, we find that firms that engage in patent pledge witness fewer new patent applications post-patent pledge, compared to firms with similar characteristics but not engaged in patent pledge. This effect is more pronounced for firms that pledge more patents in a single pledging event and for firms whose pledged patents are in their core technology domains. In addition, this effect is stronger for younger firms. We further examine the impact of patent pledge on the quality and exploratoriness of firms’ new patents, as well as on their operational and financial performance after the patent pledge.
