Microeconometric Evidence of Financing Frictions and Innovative Activity

64 Pages Posted: 28 Sep 2012

See all articles by Amaresh Kumar Tiwari

Amaresh Kumar Tiwari

University of Tartu - Faculty of Economics and Business Administration

Pierre Mohnen

Maastricht University - UNU-MERIT

Franz C. Palm

University of Maastricht - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Sybrand Schim van der Loeff

University of Maastricht

Date Written: September 28, 2012

Abstract

Using a unique panel data of Dutch innovation and financial variables we empirically investigate how financing and innovation vary across firm characteristics. The study also tries to gauge the extent of market failure due to the presence of financing frictions. Our main findings can be summarized as follows. First, when firms face endogenous financial constraints, debt financing and innovation choices are not independent of firm characteristics such as age, size, and existing leverage. In the absence of financial constraints, however, firms, almost uniformly across firm characteristics, become less inclined – as compared to firms facing constraints - to engage in innovative activity by raising debt. Second, small, young, highly leveraged, and firms with lower collateralizable assets are more likely to be financially constrained. Third, large, young, and low leveraged firms are more likely to be innovators. Fourth, financial constraints adversely affect a firm’s R&D intensity. Fifth, smaller and younger firms are more R&D intensive. A new estimator, that combines the method of “Correlated Random Effects” and “Control Function” to account for the endogeneity of regressors in a structural equations model, is developed.

Keywords: Financial Constraints, Capital Structure, R&D, Innovation, Firm Dynamics, Market Failure, Panel Data, Correlated Random Effects, Control Function, Expected a Posteriori

JEL Classification: G30, O30, C30

Suggested Citation

Tiwari, Amaresh Kumar and Mohnen, Pierre and Palm, Franz C. and van der Loeff, Sybrand Schim, Microeconometric Evidence of Financing Frictions and Innovative Activity (September 28, 2012). CIRANO - Scientific Publications 2012s-24, Available at SSRN: https://ssrn.com/abstract=2153767 or http://dx.doi.org/10.2139/ssrn.2153767

Amaresh Kumar Tiwari

University of Tartu - Faculty of Economics and Business Administration ( email )

Narva Rd. 4-A214
Tartu 51009, 51009
Estonia

Pierre Mohnen (Contact Author)

Maastricht University - UNU-MERIT ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
31-43-3884464 (Phone)
31-43-3884495 (Fax)

Franz C. Palm

University of Maastricht - Department of Economics ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31-(0)43-3883833 (Phone)
+31-(0)43-3258535 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.cesifo.de

Sybrand Schim Van der Loeff

University of Maastricht ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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