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Do financing constraints matter for R&D?

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  • Brown, James R.
  • Martinsson, Gustav
  • Petersen, Bruce C.

Abstract

Information problems and lack of collateral value should make R&D more susceptible to financing frictions than other investments, yet existing evidence on whether financing constraints limit R&D is decidedly mixed, particularly in the studies of non-U.S. firms. We study a large sample of European firms and also find little evidence of binding finance constraints when we estimate standard investment-cash flow regressions. However, we find strong evidence that the availability of finance matters for R&D once we directly control for: (i) firm efforts to smooth R&D with cash reserves and (ii) firm use of external equity finance. Our study provides a framework for evaluating financing constraints when firms rely extensively on external finance and endogenously manage buffer stocks of liquidity to keep investment smooth, and our findings show that controlling for this smoothing behavior is critical for uncovering the full effect of financing constraints. Our findings also indicate a major role for external equity in financing R&D, highlighting a causal channel through which stock market development and liberalization can promote economic growth by increasing firm-level innovative activity.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:8:p:1512-1529
    DOI: 10.1016/j.euroecorev.2012.07.007
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    More about this item

    Keywords

    Financing innovation; R&D financing constraints; Finance and growth; Stock market development; Value of liquidity;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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