Patent now or later? Corporate financing decisions, agency costs and social benefits

We analyze the incentives of firms to delay patenting a product they intend to commercialize to maximize the period they can exploit the market under patent protection. We model the patenting and market-launching decisions and consider partial financing of these costs with debt. Agency conflicts between equityholders and debtholders arise concerning the optimal patenting and market-launch timing and represent a classical moral hazard problem. We show that delaying patenting increases the value of the firm significantly in the absence of preemption risk. In the presence of preemption risk, the firm that aims to maximize the market exploitation period under patent protection accelerates the market-launch of the product. The use of debt financing reduces the incentives to delay patenting, but generates significant agency costs in terms of loss of firm value, debt capacity and increases in the fair credit spreads. When considered in terms of social effects, the impact of the agency conflicts is overall positive, as it accelerates patenting and market-launching the product and delays default.