Patent pledging as collateral: Navigating the strategic dilemma from patents' private-market values

Abstract

This study examines the strategic dilemma firms face when pledging patents as loan collateral, stemming from a disparity between the patents' private, firm-specific value and their public market value. We highlight how this value gap creates an information asymmetry for the borrowing firms in dealing with credit lenders, and propose that the borrowers address this challenge through a hierarchical collateral strategy: they pledge core-but-generalizable patents and reinforcing their value with credible signals - such as high external citations that indicate broad technological relevance - to convert private, firm-specific value into visible, lender-facing indicators of market potential, helping to close the information gap. Our framework shows how innovative firms navigate the trade-off in using patents as collateral by pledging those with high market value to ensure liquidity, while also ensuring high firm-specific value to signal credible commitment.