Scandinavian Working Papers in Economics

Working Paper Series in Economics and Institutions of Innovation,
Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies

No 174: Finance and R&D Investments - is there a debt overhang effect on R&D investments?

Gustav Martinsson ()
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Gustav Martinsson: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, Postal: CESIS - Centre of Excellence for Science and Innovation Studies, Royal Institute of Technology, SE-100 44 Stockholm, Sweden

Abstract: The motivation of this paper is the rather naive approach to debt as a financing source of R&D investment in the empirical investment literature. I focus on long-term relational debt based on its appealing contractual properties and discover a debt overhang effect for the relationship between additional long-term debt and R&D investment. I augment an error correction accelerator-profit specification to include changes in long-term debt as a transitory determinant of R&D investment as has been done with internal finance previously. Firms with previous period debt levels around 0.60 display a positive relationship between additional long-term debt and R&D investment.

Keywords: Econometrics; Financial Economics; Financial Markets; R&D; Financing Constraints

JEL-codes: C01; O16; O30

65 pages, March 25, 2009

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