Patent Applications and the Cost of Debt: Evidence from Korea

In this study, I examine the effect of patent applications on the cost of debt. Using a sample of Korean listed firms, I show that debtholders charge a significantly lower cost of debt to a firm with higher patent counts or greater patent productivity. This finding remains robust while considering the differences of firms with patents versus without patents, controlling for unobservable firm-specific factors by employing a firm-fixed effect model, and using a dynamic panel data model to mitigate an endogeneity concern that debt financing affects patenting activity. I further explore three possible channels through which patent applications affect the cost of debt. First, patents mitigate the degree of information asymmetry between firms and potential debtholders. Second, they provide expectations for increased future cash flows. Third, patents enable improved redeployability of assets. This study sheds lights on the real effects of patent applications on firms’ costs of debt.