Abstract
We show that there is a U-shaped relationship between bank loan spread and borrower innovation activity, which indicates a ceiling for bank profit from lending to innovative firms. Experienced banks can benefit from lending to innovation-competitive firms by achieving lower covenant violation rates or increasing probabilities of future business. And we find evidence that only expertise banks in lending to innovative borrowers have the ability to evaluate innovation. And innovation efficiency matters more than patent number from bank’s view. Our paper contributes to the literature in understanding the mechanism by which banks value borrower innovation.
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