Abstract
In this paper I investigate if and how strengthening creditor rights enables firms to engage in more innovation activities, using the enactment of a new property law in China as a natural experiment. By using a newly constructed measure of land unavailability, I find that firms in cities where construction is more constrained by geography substitute short-term debt with long-term debt, hold less internal cash, invest more on intangible assets and eventually generate more patents after the enactment of the law. Moreover, this positive effect of the reform on innovation is more profound for firms that have more tangible assets, that are dependent on debt financing and that are more financially constrained. Those results highlight the importance of debt financing for innovation and shed light on the underlying mechanisms through which it takes effect.