![]() ![]() We test whether lead arrangers retain a larger share of the loan when firms are more R&D intensive, and whether patents can reduce the need to hold a larger stake by alleviating information asymmetry. In these conditions, participating lenders require the lead arranger to retain a larger share of the loan, as only a bank with a sufficiently large stake in the borrower's performance will exert the necessary effort (see e.g., Dennis and Mullineaux, 2000 Kleimeier and Chaudhry, 2015 Simons, 1993 Sufi, 2007).Įxtending the research by Sufi (2007), we investigate how banks finance R&D intensive firms, where moral hazard problems are prominent due to high information asymmetry. These moral hazard problems are compounded when there is more information asymmetry between the borrower and lender, and monitoring thus becomes more costly for the lead arranger. This is where moral hazard problems arise, as the monitoring efforts of the lead arranger as an informed lender are unobservable for the uninformed participant lenders. The loan's lead arranger is expected to perform due diligence on the borrower and monitor the loan. Furthermore, the risk of innovation failure and the uncertain payoffs of R&D investments are important sources of information asymmetry, reducing R&D intensive borrowers’ access to credit (Hu et al., 2017).Ī complicating factor in bank lending is that many loans are “syndicated”, meaning that multiple lenders jointly offer funds to a borrowing firm (Weidner, 2000). However, the market value of R&D intensive firms often rests on hard-to-value intangible assets that provide low collateral value, while their cash flows are volatile (Hochberg et al., 2018). Bank loans enable these firms to avoid costly dilution of ownership stakes, and are an important source of external capital (Kerr and Nanda, 2015). ![]() Innovation is critical to economic growth, but R&D intensive firms often struggle to obtain financing (Mann, 2018). ![]()
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