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Equity financing and innovation: Is Europe different from the United States?

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  • Martinsson, Gustav
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    Abstract

    During the mid and late 1990s young, high-tech firms in the US experienced a supply shift in both internal and external equity fueling a finance-driven boom in corporate R&D. This paper examines whether R&D spending in Europe in a similar way was sensitive to fluctuations in the supply of internal and external equity during the late 1990s and early 2000s. I conjecture that UK and Continental Europe, due to their different financial systems, differ in terms of equity supply. I estimate dynamic R&D regression models for UK and Continental European high-tech firms separately and find significant joint cash-flow effects for newly listed firms in both samples. However, only new firms in the UK experienced a joint external equity effect as well. The findings of this paper suggest a channel through which market-based financial systems outperform the bank-based economies of Continental Europe.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 34 (2010)
    Issue (Month): 6 (June)
    Pages: 1215-1224

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    Handle: RePEc:eee:jbfina:v:34:y:2010:i:6:p:1215-1224

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Financing constraints R&D Stock issues Financial markets;

    References

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    1. Jay R. Ritter, 2003. "Differences between European and American IPO Markets," European Financial Management, European Financial Management Association, vol. 9(4), pages 421-434.
    2. Hall, Bronwyn H., 2002. "The Financing of Research and Development," Department of Economics, Working Paper Series qt34c1c643, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    3. Steven Fazzari & R. Glenn Hubbard & Bruce C. Petersen, 1988. "Financing Constraints and Corporate Investment," NBER Working Papers 2387, National Bureau of Economic Research, Inc.
    4. Aghion, P. & Howitt, P., 1989. "A Model Of Growth Through Creative Destruction," Working papers 527, Massachusetts Institute of Technology (MIT), Department of Economics.
    5. Gilchrist, S. & Himmelberg, C.P., 1995. "Evidence on the Role of Cash Flow for Investment," Papers 95-29, Columbia - Graduate School of Business.
    6. Thomas W. Bates & Kathleen M. Kahle & René M. Stulz, 2009. "Why Do U.S. Firms Hold So Much More Cash than They Used To?," Journal of Finance, American Finance Association, vol. 64(5), pages 1985-2021, October.
    7. Beck, Thorsten & Levine, Ross, 2002. "Industry growth and capital allocation:*1: does having a market- or bank-based system matter?," Journal of Financial Economics, Elsevier, vol. 64(2), pages 147-180, May.
    8. Steve Bond, 2002. "Dynamic panel data models: a guide to microdata methods and practice," CeMMAP working papers CWP09/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    9. Bronwyn H. Hall & Josh Lerner, 2009. "The Financing of R&D and Innovation," NBER Working Papers 15325, National Bureau of Economic Research, Inc.
    10. Heitor Almeida & Murillo Campello & Michael S. Weisbach, 2004. "The Cash Flow Sensitivity of Cash," Journal of Finance, American Finance Association, vol. 59(4), pages 1777-1804, 08.
    11. Robert E. Carpenter & Bruce C. Petersen, 2002. "Capital Market Imperfections, High-Tech Investment, and New Equity Financing," Economic Journal, Royal Economic Society, vol. 112(477), pages F54-F72, February.
    12. Carpenter, Robert E. & Guariglia, Alessandra, 2008. "Cash flow, investment, and investment opportunities: New tests using UK panel data," Journal of Banking & Finance, Elsevier, vol. 32(9), pages 1894-1906, September.
    13. Agca, Senay & Mozumdar, Abon, 2008. "The impact of capital market imperfections on investment-cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 32(2), pages 207-216, February.
    14. Ascioglu, Asli & Hegde, Shantaram P. & McDermott, John B., 2008. "Information asymmetry and investment-cash flow sensitivity," Journal of Banking & Finance, Elsevier, vol. 32(6), pages 1036-1048, June.
    15. Alonso-Borrego, Cesar & Arellano, Manuel, 1999. "Symmetrically Normalized Instrumental-Variable Estimation Using Panel Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(1), pages 36-49, January.
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    Cited by:
    1. de Jong, Abe & Verbeek, Marno & Verwijmeren, Patrick, 2011. "Firms' debt-equity decisions when the static tradeoff theory and the pecking order theory disagree," Journal of Banking & Finance, Elsevier, vol. 35(5), pages 1303-1314, May.
    2. Adeline Saillard & Thomas Url, 2011. "Venture capital in bank - and market - based economies," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00593962, HAL.
    3. Brown, James R. & Martinsson, Gustav & Petersen, Bruce C., 2012. "Do financing constraints matter for R&D?," European Economic Review, Elsevier, vol. 56(8), pages 1512-1529.
    4. Coad, Alex & Daunfeldt, Sven-Olov & Johansson, Dan & Wennberg, Karl, 2011. "Who do High-growth Firms Employ, and Who do they Hire?," Ratio Working Papers 169, The Ratio Institute.
    5. Adeline Saillard & Thomas Url, 2011. "Venture capital in bank - and market - based economies," Documents de travail du Centre d'Economie de la Sorbonne 11025, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    6. Adeline Saillard & Thomas Url, 2011. "Venture Capital in Bank- and Market-based Economies," WIFO Working Papers 389, WIFO.
    7. Borisova, Ginka & Brown, James R., 2013. "R&D sensitivity to asset sale proceeds: New evidence on financing constraints and intangible investment," Journal of Banking & Finance, Elsevier, vol. 37(1), pages 159-173.
    8. Lai, Kam-Wah, 2011. "The cost of debt when all-equity firms raise sfinance: The role of investment opportunities, audit quality and debt maturity," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 1931-1940, August.

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