AAA Spark Meeting of Regions

Performance Pricing with Intellectual Capital

• In Event: Executive Compensation

Abstract

Exploiting the recognition of the inevitable disclosure doctrine by several states in the U.S.A., I find that better protection of intellectual capital leads to an increase in the use of accounting-based performance pricing provisions in private lending agreements. The effect is more pronounced when firms are more likely to be endowed with intellectual capital. The effect is less pronounced when firms can better enforce non-compete agreements and when the threat of hold-up by borrowers’ intellectual capital is more credible. The results suggest that when a firm can better retain its intellectual capital, lenders face less uncertainty about a project's state-contingent payoffs. As such, they offer a more complete contract ex-ante by committing to a pre-negotiated pricing schedule. I provide evidence supporting this mechanism. The study sheds light on the contrasting theoretical predictions relating intellectual capital to the use of performance pricing provisions.

Author

• Mahfuz Chy, University of Missouri-Columbia