Working Paper: NBER ID: w19947
Authors: Dirk Czarnitzki; Bronwyn H. Hall; Hanna Hottenrott
Abstract: Information about the success of a new technology is usually held asymmetrically between the research and development (R&D)-performing firm and potential lenders and investors. This raises the cost of capital for financing R&D externally, resulting in financing constraints on R&D especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms' patenting activity on the degree of financing constraints on R&D for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal.
Keywords: patents; financing constraints; R&D; quality signals; small firms
JEL Codes: G32; O31; O32; O38
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Past patent activity (O34) | R&D investment sensitivity to internal liquidity (G31) |
| Patent stock (O34) | R&D spending (O32) |
| Patent stock + Working capital (G31) | R&D investment (small firms) (O32) |
| Patents (O34) | Financing constraints (small firms) (G32) |
| Patents (O34) | Signaling value to lenders (G19) |
| Forward citations (Y50) | Financing constraints (G32) |