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Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms

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  • Sabrina T Howell
  • J David Brown

Abstract

This paper examines how employee earnings respond to a one-time cash flow shock in the form of a government R&D grant. In a regression discontinuity design, we find that the grant immediately increases average annual employee-level earnings by 2.9$\%$. This benefit accrues only to incumbent employees and rises with job tenure. The grant also affects firm growth, but the initial wage patterns do not appear to reflect growth or productivity. Instead, the evidence supports implicit equity financing within the firm, where employees initially accept lower wages from financially constrained firms and earn more when the firm has ability to pay.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Sabrina T Howell & J David Brown, 2023. "Do Cash Windfalls Affect Wages? Evidence from R&D Grants to Small Firms," The Review of Financial Studies, Society for Financial Studies, vol. 36(5), pages 1889-1929.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:5:p:1889-1929.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhac076
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    More about this item

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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