2018/31 | LEM Working Paper Series | ||||||||||||||||
The pecking order of innovation finance |
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Andrea Mina and Henry Lahr |
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Keywords | |||||||||||||||||
R&D, innovation, information asymmetries, capital structure, pecking order
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JEL Classifications | |||||||||||||||||
G32, O16, O30
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Abstract | |||||||||||||||||
This paper examines the relationship between firms’ innovation
activities and the hierarchy of financing behaviours. We analyse the
role of innovation inputs (R&D), intermediate outputs (patents) and
outcomes (product and process innovations) as sources of information
asymmetry in financing decisions. Our focus on mainly unlisted
companies allows us to study the effects of information asymmetries in
the context where they are most severe, that is, among small and
medium-sized firms. We identify the effect of innovation, alongside
the size of the firm, its age and its human capital, on the order of
directly observed external capital allocations. Our results show that
innovation is strongly associated with a pecking order characterised
by increasing agency costs, and that the more uncertain the innovation
signal, the stronger its effect on the pecking order. In further
robustness tests, this relationship and associated hierarchy of
external financing emerge from the data without imposing an a-priori
pecking order.
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