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Finance and Innovation: The Case of Publicly Traded Firms

50 Pages Posted: 9 Jun 2005 Last revised: 9 Oct 2014

Julian Atanassov

University of Nebraska

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics

Amit Seru

Stanford University

Date Written: May 1, 2007

Abstract

We hypothesize that public firms that create novel innovations rely more on arm's length financing (equity and public debt) than on relationship based bank financing. A primary reason is that banks, unable to evaluate novel technologies, will tend to discourage investing in innovative projects and be more prone to shut down ones that are ongoing. Using a large panel of US companies from 1974-2000, we find that consistent with our predictions, firms that rely more on arm's length financing have a larger number of patents and these patents are more significant in terms of influencing subsequent patents. We confirm our findings by showing a significant increase in innovative activity of firms following a large infusion of arm's length financing and no such pattern after a similar infusion of bank loans. Creating novel innovations leads to a significantly higher firm value and suggests that firms would rationally take into account the potential impact of innovative activity when making their financing choices. Finally, we use an IV approach to ameliorate endogeneity concerns and demonstrate that our findings are driven primarily by innovative firms choosing their financing arrangements.

Keywords: Technological, Innovation, Finance, Growth, Patent, Citations, Arm's Length, Capital Structure

JEL Classification: G30, O33

Suggested Citation

Atanassov, Julian and Nanda, Vikram K. and Seru, Amit, Finance and Innovation: The Case of Publicly Traded Firms (May 1, 2007). Ross School of Business Paper No. 970; AFA 2007 Chicago Meetings Paper; EFA 2006 Zurich Meetings Paper. Available at SSRN: https://ssrn.com/abstract=740045 or http://dx.doi.org/10.2139/ssrn.740045

Julian Atanassov

University of Nebraska ( email )

CBA
University of Nebraska, Lincoln
Lincoln, NE 68588
United States

Vikram K. Nanda

University of Texas at Dallas - School of Management - Department of Finance & Managerial Economics ( email )

2601 North Floyd Road
P.O. Box 830688
Richardson, TX 75083
United States

Amit Seru (Contact Author)

Stanford University ( email )

650 Knight Management
Stanford, CA 94305
United States

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