Optimal Financing for R&D-Intensive Firms
41 Pages Posted: 11 Sep 2017 Last revised: 20 Aug 2018
Date Written: September 8, 2017
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