Campus Units

Finance

Document Type

Article

Publication Version

Accepted Manuscript

Publication Date

11-2012

Journal or Book Title

European Economic Review

Volume

56

Issue

8

First Page

1512

Last Page

1529

DOI

10.1016/j.euroecorev.2012.07.007

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.

Comments

This is an accepted manuscript from European Economic Review, 2012 56(8); 1512-1529. DOI: 10.1016/j.euroecorev.2012.07.007. Posted with permission.

Copyright Owner

Elsevier B.V.

Language

en

File Format

application/pdf

Published Version

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