Optimal Financing for R&D-Intensive Firms
58 Pages Posted: 11 Sep 2017 Last revised: 29 Aug 2023
There are 2 versions of this paper
Optimal Financing for R&D-Intensive Firms
Optimal Financing for R&D-Intensive Firms
Date Written: August 28, 2023
Abstract
We develop a theory of optimal financing for R&D-intensive firms. With only market financing, the firm relies exclusively on equity financing and carries excess cash, but underinvests in R&D. We use mechanism design to examine how intermediated financing can attentuate this underinvestment. The mechanism combines equity with put options such that investors insure firms against R&D failure and firms insure investors against high R&D payoffs not being realized.
Keywords: R&D Investments, Innovation, Capital Structure, Cash Holdings, Mechanism Design
JEL Classification: D82, D83, G31, G32, G34, O31, O32
Suggested Citation: Suggested Citation