Knowledge that Transforms

This study explores the association between firm innovation and loan covenant strictness. We find that lenders construct stricter contracts for firms filing more patents, consistent with lenders imposing more oversight on firms when they enter the commercialization stage after having demonstrated their inventiveness. Our results hold under propensity score matching and entropy balancing, and when exploiting the American Inventors Protection Act as a shock affecting unrelated banks’ access to patent filing information. The relationship we document is stronger when the lender has more expertise and for firms with higher default risk. We demonstrate that borrowers’ patent filings are associated with more future R&D and capital investment and with a higher likelihood of their acquiring firms in the industry of their patent filings. Our results are consistent with the theoretical prediction that lenders interpret patent filings as indicative of high inventive potential that requires stricter discipline and oversight by lenders in order to be converted into actual business success, and with them designing debt contract terms accordingly.

We conduct a randomized field experiment (RFE) to assess whether startup firms perceive accounting expertise as an important investor credential. We send 13,358 unsolicited and unique emails to active startup firms across the US, showing an interest in them with a proposition to meet a bogus investor. The experiment has high response rates, with 4,535 (33.94%) opened emails and 828 (6.19%) website visits, reflecting investors’ proliferating practice of outbound origination to contact new startups. Our RFE compares startup reactions to fictitious investors with certified public accountant (CPA) designations versus two control groups: investors without credentials and those with other professional licenses. Startup firms are 48% likelier to read unsolicited emails from CPA-bearing investors and 47% likelier to visit their websites, relative to investors with a medical license. We document an analogous preference for CPA-bearing investors even when we separately analyze startups in medical-related industries. This gap persists when investors pose as angels, venture capitalists (VCs), or without professional licenses. The relatively low percentage (2.5%) of email bounces and spam reports makes it unlikely that spam algorithms drive the findings. Further tests reveal that the response rates differ by firm age, which is inconsistent with spam filter explanations but congruent with startup firms’ demand for accounting expertise. Finally, we undertake a follow-up experiment with 3,443 new startups to distinguish between accounting and general business expertise using a master’s in business administration (MBA). Startups are 13.8% likelier to read emails from a CPA-bearing investor than from an MBA-credentialed investor and 22.6% more likely to visit the CPA-bearing investor’s website.