KTH/CESIS Working Paper Series in Economics and Institutions of Innovation
James R. Brown
Do Financing Constraints Matter for R&D?
(), Gustav Martinsson
() and Bruce C. Petersen
Abstract: Information problems and lack of collateral value should
make R&D more susceptible to financing frictions than other investments,
yet existing evidence on whether financing constraints limit R&D is
decidedly mixed, particularly in studies of non-U.S. firms. We study a
large sample of European firms and also find little evidence of binding
finance constraints when we estimate standard investment-cash flow
regressions. However, we find strong evidence that the availability of
finance matters for R&D once we directly control for: i) firm efforts to
smooth R&D with cash reserves, and ii) firm use of external equity finance.
Our study provides a framework for evaluating financing constraints when
firms rely extensively on external finance and endogenously manage buffer
stocks of liquidity to keep investment smooth, and our findings show that
controlling for this smoothing behavior is critical for uncovering the full
effect of financing constraints. Our findings also indicate a major role
for external equity in financing R&D, highlighting a causal channel through
which stock market development and liberalization can promote economic
growth by increasing firm-level innovative activity.
Keywords: Financing innovation; R&D financing constraints; Finance and growth; Stock market development; Value of liquidity; (follow links to similar papers)
JEL-Codes: G31; G32; (follow links to similar papers)
41 pages, January 21, 2015
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