Working Paper: CEPR ID: DP2056
Authors: Jürgen Weigand; David B. Audretsch
Abstract: This paper examines the impact of industry knowledge conditions and corporate governance structures on tangible investment and its financing. Based on a large panel data set of German firms we investigate whether liquidity constraints vary systematically across firms engaged in activities reflecting very different knowledge conditions. In particular, we compare the extent of liquidity constraints in science-based firms with non science-based firms. This distinction is important because science-based firms generally fit the characteristics of market failure identified by Kenneth Arrow. Science-based economic activity is subject to high uncertainty, asymmetric knowledge and non-exclusiveness so liquidity constraints might be severe. Surprisingly, science seems to make a difference in that firms in science-based industries are less liquidity constrained than are their non science-based counterparts. In fact, the larger science-based firms do not seem to face liquidity constraints at all. However, governance structures play an important role. After accounting for the mode of corporate governance, we observe that the owner-controlled but not the manager-controlled firms are significantly liquidity constrained.
Keywords: determinants of investment; corporate governance
JEL Codes: G3; L2; O31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| liquidity constraints in science-based industries (D25) | liquidity constraints in non-science-based industries (L69) |
| cash flow (E50) | investment in science-based firms (G31) |
| cash flow (E50) | investment in non-science-based firms (G31) |
| cash flow as a source of internal finance (O16) | access to external finance (O16) |
| governance structures (G38) | liquidity constraints (E41) |
| owner-controlled firms (J54) | liquidity constraints (E41) |
| manager-controlled firms (G34) | liquidity constraints (E41) |