Financing constraints and a firm's decision and ability to innovate: establishing direct and reverse effects
AbstractThe paper analyzes the existence and impact of …nancing constraints as a possibly serious obstacle to innovation by …rms. Direct measures of …nancing constraints are employed using survey data collected by the Banque de France and Eurostat, which overcomes the problems with the traditional approach of trying to deduce indirectly the existence and impact of …nancing constraints through the signi…cance of …rm wealth variables. The importance of using direct as opposed to indirect measures of …nancing constraints has been illustrated recently by two articles in this Journal (Moyen (2004) using a synthetic sample methodology, and Hennessy and Whited (2007) through the method of simulated moments). The econometric framework we employ in our study is the simultaneous bivariate probit with mutual endogeneity of direct indicators of …nancial constraints and innovation decisions by …rms. The pa- per discusses the important identi…cation issue of coherency conditions in such LDV models with endogeneity and ‡exible temporal and contemporaneous correlations in the unobservable error terms. Our novel methods for establishing coherency condi- tions allow us for the …rst time to estimate models hitherto classi…ed as incoherent through the use of prior sign restrictions on model parameters. We are thus able to quantify the interaction between …nancing constraints and a …rm’s decision and ability to innovate without forcing the econometric models to be recursive. Hence, we obtain direct as well as reverse interaction e¤ects, leading us to conclude that binding …nancing constraints discourage innovation and at the same time innovative …rms are more likely to face binding …nancing constraints.
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Bibliographic InfoPaper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 4774.
Length: 47 pages
Date of creation: Jun 2007
Date of revision:
Limited Dependent Variable Models; Coherency Conditions;
Other versions of this item:
- Hajivassiliou, V. & Savignac, F., 2008. "Financing Constraints and a Firm's Decision and Ability to Innovate: Establishing Direct and Reverse Effects," Working papers 202, Banque de France.
- Vassilis Hajivassiliou & Frédérique Savignac, 2007. "Financing Constraints and a Firm’s Decision and Ability to Innovate: Establishing Direct and Reverse Effects," FMG Discussion Papers dp594, Financial Markets Group.
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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