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The financing decisions of innovative firms

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Author Info
Casson, Peter D.
Martin, Roderick
Nisar, Tahir M.
Abstract

The paper examines the relation between forms of financing and the level of expenditure on research and development (R&D). The paper shows that the probability of issuing new equity rises monotonically with the level of expenditure on R&D, whilst the use of debt finance follows an inverted U curve, rising and then falling as R&D expenditure rises. The analysis confirms [`]control rights' theories of financing, in which firms follow an established hierarchy of preferences for modes of financing, with debt preferred to equity since it involves less loss of control rights. The mode of financing is linked to characteristic types of innovation, with debt financing associated with incremental innovation and equity funding with R&D intensive innovation, as in pharmaceuticals. The paper concludes by suggesting a linkage between modes of financing, types of innovation and business systems, with the UK's innovation pattern linked to market financing contrasting with the relationship financing of bank oriented systems such as Germany.

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Publisher Info
Article provided by Elsevier in its journal Research in International Business and Finance.

Volume (Year): 22 (2008)
Issue (Month): 2 (June)
Pages: 208-221
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Handle: RePEc:eee:riibaf:v:22:y:2008:i:2:p:208-221

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  1. Evens Salies, 2009. "A test of the Schumpeterian hypothesis in a panel Of European electric utilities," Documents de Travail de l'OFCE 2009-19, Observatoire Francais des Conjonctures Economiques (OFCE). [Downloadable!]
  2. Martinsson, Gustav, 2009. "Finance and R&D Investments - is there a debt overhang effect on R&D investments?," Working Paper Series in Economics and Institutions of Innovation 174, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies. [Downloadable!]
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