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Financial Signaling by Innovative Nascent Entrepreneurs

  • David B. Audretsch

    (Indiana University and Max Planck Institute of Economics, Jena, Germany)

  • Werner Bönte


    (Bergische Universität Wuppertal and Max Planck Institute of Economics, Jena, Germany)

  • Prashanth Mahagaonkar

    (Max Planck Institute of Economics, Jena, Germany)

External finance is central for nascent entrepreneurs, people in the process of starting new ventures. We argue that nascent entrepreneurs use patents and prototypes in order to signal their ability to appropriate the returns from their innovation as well as the project's feasibility. Our analysis of 900 nascent entrepreneurs finds that patents and prototypes increase the likelihood of obtaining equity finance. Thus, if signals are credible, innovation positively impacts external financing. Interestingly, entrepreneurs in planning versus early start-up stage portray different signaling effects, indicating that the relation between finance and innovation depends on the stage of a start-up lifecycle.

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Paper provided by Friedrich-Schiller-University Jena, Max-Planck-Institute of Economics in its series Jena Economic Research Papers with number 2009-012.

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Date of creation: 01 Feb 2009
Date of revision:
Handle: RePEc:jrp:jrpwrp:2009-012
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