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Investment and Research and Development at the Firm Level: Does the Source of Financing Matter?

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  • Bronwyn H. Hall

Abstract

The elasticity of investment and R&D investment with respect to cash flow is unambiguously positive in a large panel of U.S. manufacturing firms from 1973 to 1987. even with proper controls for permanent differences across firms and for simultaneity. I argue that the evidence favors liquidity constraints rather than just demand effects as the cause of this finding. Other results are that debt is not favored as a form of finance for R&D-intensive firms; leverage ratios and R&D investment are strongly negatively correlated across firms and this is not accounted for by differences in corporate taxation. Finally, the contemporaneous relationship between changes in debt levels and investment which I have previously documented (Hall 1990b and Hall 1991) is one of simultaneity, and apparently transitory, unlike the relationship between cash flow and investment.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4096.

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Date of creation: Jun 1992
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Handle: RePEc:nbr:nberwo:4096

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  1. Auerbach, Alan J., 1984. "Taxes, firm financial policy and the cost of capital: An empirical analysis," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 27-57.
  2. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
  3. Robert N. McCauley & Steven A. Zimmer, 1989. "Explaining international differences in the cost of capital: the United States and United Kingdom versus Japan and Germany," Research Paper 8913, Federal Reserve Bank of New York.
  4. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  5. Partha Dasgupta & Joseph Stiglitz, 1980. "Uncertainty, Industrial Structure, and the Speed of R&D," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 1-28, Spring.
  6. Altshuler, Rosanne, 1988. "A Dynamic Analysis of the Research and Experimentation Credit," National Tax Journal, National Tax Association, vol. 41(4), pages 453-66, December.
  7. Hall, Bronwyn H. & Hayashi, Fumio, 1989. "Research and Development as an Investment," Department of Economics, Working Paper Series qt8br8d266, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  8. Joseph E. Stiglitz, 1987. "Technological Change, Sunk Costs, and Competition," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 883-947.
  9. Don Fullerton & Andrew B. Lyon, 1987. "Tax Neutrality and Intangible Capital," NBER Working Papers 2430, National Bureau of Economic Research, Inc.
  10. Mansfield, Edwin, 1986. "The R&D Tax Credit and Other Technology Policy Issues," American Economic Review, American Economic Association, vol. 76(2), pages 190-94, May.
  11. John Bound & Clint Cummins & Zvi Griliches & Bronwyn H. Hall & Adam B. Jaffe, 1982. "Who Does R&D and Who Patents?," NBER Working Papers 0908, National Bureau of Economic Research, Inc.
    • John Bound & Clint Cummins & Zvi Griliches & Bronwyn H. Hall & Adam B. Jaffe, 1984. "Who Does R&D and Who Patents?," NBER Chapters, in: R & D, Patents, and Productivity, pages 21-54 National Bureau of Economic Research, Inc.
  12. Zvi Griliches & Bronwyn H. Hall & Ariel Pakes, 1988. "R&D, Patents, and Market Value Revisited: Is There Evidence of A SecondTechnological Opportunity Related Factor?," NBER Working Papers 2624, National Bureau of Economic Research, Inc.
  13. Bronwyn H. Hall, 1991. "Corporate Restructuring and Investment Horizons," NBER Working Papers 3794, National Bureau of Economic Research, Inc.
  14. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
  15. Kenneth Arrow, 1962. "Economic Welfare and the Allocation of Resources for Invention," NBER Chapters, in: The Rate and Direction of Inventive Activity: Economic and Social Factors, pages 609-626 National Bureau of Economic Research, Inc.
  16. Griliches, Zvi, 1992. " The Search for R&D Spillovers," Scandinavian Journal of Economics, Wiley Blackwell, vol. 94(0), pages S29-47, Supplemen.
  17. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
  18. Gilbert, Richard J & Newbery, David M G, 1982. "Preemptive Patenting and the Persistence of Monopoly," American Economic Review, American Economic Association, vol. 72(3), pages 514-26, June.
  19. Bronwyn H. Hall & Zvi Griliches & Jerry A. Hausman, 1984. "Patents and R&D: Is There A Lag?," NBER Working Papers 1454, National Bureau of Economic Research, Inc.
  20. Akerlof, George A, 1970. "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, MIT Press, vol. 84(3), pages 488-500, August.
  21. Lach, Saul & Schankerman, Mark, 1989. "Dynamics of R&D and Investment in the Scientific Sector," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 880-904, August.
  22. Bhattacharya, Sudipto & Ritter, Jay R, 1983. "Innovation and Communication: Signalling with Partial Disclosure," Review of Economic Studies, Wiley Blackwell, vol. 50(2), pages 331-46, April.
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