Managing Corporate Investment and R&D Financing: Are They Really Different?

Abstract

The aim of this paper is to identify the different role of financial funds in traditional and R&D investments in Italian firms. Given its intrinsic characteristics, R&D is usually characterized by high information opacity and thus implies, coherently with the asymmetric information theory, greater difficulties in finding external financial funding. The higher risk related to R&D projects could entail some form of financial constraints. However, signaling mechanisms such as self-financing could correct such a market imperfection. The aim of this research is to investigate the determinants of R&D investment internal financial funding (self-financing). Traditional and R&D investments are considered to indicate a possible interaction between different self-financing patterns. Using different econometric models (Logit, OLS and SUR), our results show how information and agency costs, reflected in firm characteristics, affect financing decisions in both traditional and R&D investments. Our findings are consistent with the hypothesis that, in information opaque firms, internal equity plays an important role in R&D financing decisions. To the contrary, traditional investments are less related to self-financing. Public subsidies play a crucial role as a stimulus of R&D and investment self-financing. The overall evidence indicates that banking variables are also more relevant in traditional investments.

Keywords: Corporate Financing, Relationship lending, Capital Structure, R&D, SMEs

JEL Classification: D82, G21, G32, E51