Abstract

http://ssrn.com/abstract=740045
 
 

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Finance and Innovation: The Case of Publicly Traded Firms


Julian Atanassov


University of Oregon

Vikram K. Nanda


Georgia Institute of Technology - College of Management

Amit Seru


University of Chicago - Booth School of Business and NBER

May 2007

Ross School of Business Paper No. 970
AFA 2007 Chicago Meetings Paper
EFA 2006 Zurich Meetings Paper

Abstract:     
We hypothesize that public firms that create novel innovations rely more on arm's length financing (equity and public debt) than on relationship based bank financing. A primary reason is that banks, unable to evaluate novel technologies, will tend to discourage investing in innovative projects and be more prone to shut down ones that are ongoing. Using a large panel of US companies from 1974-2000, we find that consistent with our predictions, firms that rely more on arm's length financing have a larger number of patents and these patents are more significant in terms of influencing subsequent patents. We confirm our findings by showing a significant increase in innovative activity of firms following a large infusion of arm's length financing and no such pattern after a similar infusion of bank loans. Creating novel innovations leads to a significantly higher firm value and suggests that firms would rationally take into account the potential impact of innovative activity when making their financing choices. Finally, we use an IV approach to ameliorate endogeneity concerns and demonstrate that our findings are driven primarily by innovative firms choosing their financing arrangements.

Number of Pages in PDF File: 50

Keywords: Technological, Innovation, Finance, Growth, Patent, Citations, Arm's Length, Capital Structure

JEL Classification: G30, O33

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Date posted: June 9, 2005  

Suggested Citation

Atanassov, Julian and Nanda, Vikram K. and Seru, Amit, Finance and Innovation: The Case of Publicly Traded Firms (May 2007). Ross School of Business Paper No. 970; AFA 2007 Chicago Meetings Paper; EFA 2006 Zurich Meetings Paper. Available at SSRN: http://ssrn.com/abstract=740045 or http://dx.doi.org/10.2139/ssrn.740045

Contact Information

Julian Atanassov
University of Oregon ( email )
Lundquist College of Business
1208 University of Oregon
Eugene, OR 97403
United States
Vikram K. Nanda
Georgia Institute of Technology - College of Management ( email )
800 West Peachtree St., NW
Atlanta, GA 30308-1149
United States
404-385-8156 (Phone)
Amit Seru (Contact Author)
University of Chicago - Booth School of Business and NBER ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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