Financing Innovation and Growth: Cash Flow, External Equity and the 1990s R&D Boom

Brown, James R.; Fazzari, Steven M.; Petersen, Bruce C.

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Financing Innovation and Growth: Cash Flow, External Equity and the 1990s R&D Boom

Journal of Finance, Vol. 64. No. 1, pp. 151-185, February 2009

50 Pages Posted: 3 Aug 2010

See all articles by James R. Brown

James R. Brown

Iowa State University - Department of Finance

Bruce C. Petersen

Washington University in St. Louis - Department of Economics

Date Written: April 12, 2008

Abstract

The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth.

Keywords: R&D, cash flow, equity finance, economic growth

JEL Classification: G30, O30, O40, D92

Suggested Citation: Suggested Citation

Brown, James R. and Fazzari, Steven M and Petersen, Bruce Clayton, Financing Innovation and Growth: Cash Flow, External Equity and the 1990s R&D Boom (April 12, 2008). Journal of Finance, Vol. 64. No. 1, pp. 151-185, February 2009, Available at SSRN: https://ssrn.com/abstract=1000382