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Microeconometric evidence of financing frictions and innovative activity

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Author Info

  • Tiwari, Amaresh K.

    ()
    (University of Liege)

  • Mohnen, Pierre

    ()
    (UNU-MERIT/MGSoG, Maastricht University, and CIRANO)

  • Palm, Franz C.

    ()
    (Maastricht University, and CESifo)

  • Schim van der Loeff, Sybrand

    ()
    (Maastricht University)

Abstract

Using a unique panel data of Dutch innovation and financial variables we empirically investigate how financing and innovation vary across firm characteristics. The study also tries to gauge the extent of market failure due to the presence of financing frictions. Our main findings can be summarized as follows. First, when firms face endogenous financial constraints, debt financing and innovation choices are not independent of firm characteristics such as age, size, and existing leverage. In the absence of financial constraints, however, firms, almost uniformly across firm characteristics, become less inclined - as compared to firms facing constraints - to engage in innovative activity by raising debt. Second, small, young, highly leveraged, and firms with lower collateralizable assets are more likely to be financially constrained. Third, large, young, and low leveraged firms are more likely to be innovators. Fourth, financial constraints adversely affect a firm’s R&D intensity. Fifth, smaller and younger firms are more R&D intensive. A new estimator, that combines the method of "Correlated Random Effects" and "Control Function" to account for the endogeneity of regressors in a structural equations model, is developed.

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Bibliographic Info

Paper provided by United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT) in its series MERIT Working Papers with number 062.

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Date of creation: 2012
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Handle: RePEc:unm:unumer:2012062

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Keywords: Financial Constraints; Capital Structure; R&D; Innovation; Firm Characteristics; Panel Data; Correlated Random Effects; Control Function;

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