The Effects of Patent Quality on Cost of Debt: Evidence from Korea

Purpose – The purpose of this study is to examine the relations between patent quality and the cost of debt. Given that innovation contributes to productivity and firm value, higher patent quality is expected to reduce future uncertainty and creditors are likely to respond positively. Design/methodology/approach – We analyze 6,220 firm-year observations from 2015 to 2023. We use OLS regressions to examine the relations between patent quality proxied by four elements of a patent (claims, family patents, citations, and inventors) and the cost of debt (borrowing rate). We conduct additional analyses to verify that the results are robust under alternative measures of patent quality or cost of debt. Findings – The results show that patent quality is negatively and significantly related with the cost of debt. These findings suggest that creditors are likely to incorporate patent quality into the pricing the lending rate. Research implications or Originality – This study conveys an important practical implication to firms that the increases in the quality of patents could reduce the cost of a debt. Also, our findings could enhance the understanding on the role and importance of patent in business by using a four-dimensional construct of patent quality to show that creditors draw broadly on qualitative patent signals when setting the lending rate.