The Pecking Order of Innovation Finance

43 Pages Posted: 16 Aug 2018 Last revised: 28 Aug 2018

See all articles by Andrea Mina

Andrea Mina

Scuola Superiore Sant'Anna; University of Cambridge - Judge Business School

Henry Lahr

The Open University - Business School; University of Cambridge - Centre for Business Research (CBR)

Date Written: August 1, 2018

Abstract

This paper examines the relationship between firms’ innovation activities and the hierarchy of financing behaviors. We analyse the role of innovation inputs (R&D), intermediate outputs (patents) and outcomes (product and process innovations) as sources of information asymmetry in financing decisions. Our focus on mainly unlisted companies allows us to study the effects of information asymmetries in the context where they are most severe, that is, among small and medium-sized firms. We identify the effect of innovation, alongside the size of the firm, its age and its human capital, on the order of directly observed external capital allocations. Our results show that innovation is strongly associated with a pecking order of increasing agency costs, and that the more uncertain the innovation signal, the stronger its effect on the pecking order. In further robustness tests, this relationship and associated hierarchy of external financing emerge from the data without imposing an a-priori pecking order.

Keywords: R&D, Innovation, Information Asymmetries, Capital Structure, Pecking Order

JEL Classification: G32, O16, O30

Suggested Citation

Mina, Andrea and Lahr, Henry, The Pecking Order of Innovation Finance (August 1, 2018). Available at SSRN: https://ssrn.com/abstract=3224441 or http://dx.doi.org/10.2139/ssrn.3224441

Andrea Mina

Scuola Superiore Sant'Anna ( email )

Institute of Economics
Piazza Martiri della Liberta, n. 33
Pisa, 56127
Italy

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

Henry Lahr (Contact Author)

The Open University - Business School ( email )

Milton Keynes, MK6 7AA
United Kingdom

University of Cambridge - Centre for Business Research (CBR) ( email )

Top Floor, Judge Business School Building
Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.cbr.cam.ac.uk

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