Does Issuing Equity Help R&D Activity? Evidence from Non-Public Italian High-Tech Manufacturing Firms

Abstract

The aim of this paper is to evaluate the causal effect of issuing equities on the probability that the firm engages in R&D activity. In financing innovation equity is a better source of external finance than debt. Equity does not require collateral, does not increase moral hazard problems connected with the substitution of low-risk with high-risk projects, quite common when using debt, and does not raise, unlike debt, the probability of bankruptcy; equity also allows investors to entirely benefit the returns of the innovative project in case of success. The paper focuses on high-tech firms for which asymmetric information and moral hazard problems are more widespread. With an instrumental variable estimation the result is that issuing equity increases the probability that the firm has R&D expenditures by 30-40 per cent. We detect important sources of heterogeneity in this effect: the impact of issuing equities is significant only for small, young, and more leveraged high-tech firms. We also find some evidence that issuing equities increases the intensity of R&D on sales.

Keywords: R&D, innovation, equity issues, high-tech firms

JEL Classification: G21, G32, O31, O32