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Does issuing equities help R&D activity? Evidence from unlisted Italian high-tech manufacturing firms

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  • Silvia Magri

    () (Bank of Italy)

Abstract

This paper evaluates the causal effect of issuing equities on the probability that a firm will engage in R&D activity. Equity is a preferable source of external finance for innovation than debt. It does not require collateral, does not exacerbate moral hazard problems connected with the substitution of high-risk for low-risk projects, quite common when using debt, and, unlike debt, does not increase the probability of bankruptcy; equity also allows investors to reap the entire benefit of returns on successful innovative projects. The paper focuses on high-tech firms for which asymmetric information problems are more pervasive. Implementing an instrumental variable estimation, we find that issuing equity increases the probability of the firm making R&D expenditure by 30-40 per cent. We detect considerable heterogeneity across firms: the impact of issuing equity is significant only for small, young, and more highly leveraged firms. We also find interesting evidence that issuing equity increases R&D expenditure in relation to sales.

Suggested Citation

  • Silvia Magri, 2014. "Does issuing equities help R&D activity? Evidence from unlisted Italian high-tech manufacturing firms," Temi di discussione (Economic working papers) 978, Bank of Italy, Economic Research and International Relations Area.
  • Handle: RePEc:bdi:wptemi:td_978_14
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    File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/2014/2014-0978/en_tema_978.pdf
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    References listed on IDEAS

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    Cited by:

    1. Raffaello Bronzini & Gianpaolo Caramellino & Silvia Magri, 2017. "Venture capitalists at work: what are the effects on the firms they finance?," Temi di discussione (Economic working papers) 1131, Bank of Italy, Economic Research and International Relations Area.
    2. HOSONO Kaoru & TAKIZAWA Miho, 2017. "Intangible Capital and the Choice of External Financing Sources," Discussion papers 17080, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    R&D; innovation; equity issues; high-tech firms;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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