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Young Innovative Firms, Investment-Cash Flow Sensitivities and Technological Misallocation

Author

Listed:
  • Oscar Mauricio Valencia-Arana

    (Banco de la República de Colombia)

  • Jose Eduardo Gomez-Gonzalez

    (Banco de la República de Colombia)

  • Andrés Garcia-Suaza

    (Universidad del Rosario)

Abstract

Can technological misallocation generate financial frictions? We build a theoretical model with testable implications, in which the misallocation between R&D and production activities generates borrowing constraints. The investor offers the innovator a rent that is contingent to the success of its project in order to make them exert an incentive-compatible effort level. However, this rent distorts the allocation of effort between activities. Specifically, it leads to a suboptimal level of effort impulsing a reallocation of resources from production to R&D. Consequently, the investor cannot appropriate the surplus resulting from innovation. This distortion increases the cost of external financing for firms that have large amount of intangible assets. Using Compustat data for manufacturing firms in the United States between 1982 and 2007, we show that cash-flow sensitivities are positive and increasing in firms with high R&D intensities.

Suggested Citation

  • Oscar Mauricio Valencia-Arana & Jose Eduardo Gomez-Gonzalez & Andrés Garcia-Suaza, 2017. "Young Innovative Firms, Investment-Cash Flow Sensitivities and Technological Misallocation," Borradores de Economia 1004, Banco de la Republica de Colombia.
  • Handle: RePEc:bdr:borrec:1004
    DOI: 10.32468/be.1004
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    More about this item

    Keywords

    Moral Hazard; Endogenous Borrowing Constraints; and Technological Misallocation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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