An Information Economics Perspective on Main Bank Relationships and Firm R&D

49 Pages Posted: 24 Aug 2011

See all articles by Daniel Hoewer

Daniel Hoewer

ZEW – Leibniz Centre for European Economic Research

Tobias Schmidt

Deutsche Bundesbank - Research Center

Wolfgang Sofka

Tilburg University; CentER; CIR

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2011

Abstract

Information economics has emerged as the primary theoretical lens for framing financing decisions in firm R&D investment. Successful outcomes of R&D projects are either ex-ante impossible to predict or the information is asymmetrically distributed between inventors and investors. As a result, bank lending for firm R&D has been rare. However, firms can signal the value of their R&D activities and as a result reduce the information deficits that block the availability of external funding. In this study we focus on three types of signals: Firm’s existing patent stock, the presences of a joint venture investor and whether the firm has received a government R&D subsidy. We argue theoretically that all of these signals have the potential to alter the risk assessment of the firm’s main bank. Additionally, we explore heterogeneities in these risk assessments arising from the industry level and the main bank’s portfolio. We test our theoretical predictions for a sample of more than 7,000 firm observations in Germany over a multi-year period. Our theoretical predictions are only supported for firms’ past patent activity while other signals fail to alter the risk assessment of a firm’s main bank. Besides, we confirm that the risk evaluation is not randomly distributed across bank-firm dyads but depends on industry and bank characteristics.

Keywords: innovation, banking, information asymmetry

JEL Classification: 032, D82, G30

Suggested Citation

Hoewer, Daniel and Schmidt, Tobias and Sofka, Wolfgang, An Information Economics Perspective on Main Bank Relationships and Firm R&D (August 24, 2011). ZEW - Centre for European Economic Research Discussion Paper No. 11-055. Available at SSRN: https://ssrn.com/abstract=1916047 or http://dx.doi.org/10.2139/ssrn.1916047

Daniel Hoewer (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Tobias Schmidt

Deutsche Bundesbank - Research Center ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Wolfgang Sofka

Tilburg University ( email )

Netherlands

CentER ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

CIR ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

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