Does issuing equities help R&D activity? Evidence from unlisted Italian high-tech manufacturing firms

Silvia Magri ()

No 978, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: This paper evaluates the causal effect of issuing equities on the probability that a firm will engage in R&D activity. Equity is a preferable source of external finance for innovation than debt. It does not require collateral, does not exacerbate moral hazard problems connected with the substitution of high-risk for low-risk projects, quite common when using debt, and, unlike debt, does not increase the probability of bankruptcy; equity also allows investors to reap the entire benefit of returns on successful innovative projects. The paper focuses on high-tech firms for which asymmetric information problems are more pervasive. Implementing an instrumental variable estimation, we find that issuing equity increases the probability of the firm making R&D expenditure by 30-40 per cent. We detect considerable heterogeneity across firms: the impact of issuing equity is significant only for small, young, and more highly leveraged firms. We also find interesting evidence that issuing equity increases R&D expenditure in relation to sales.

Keywords: R&D; innovation; equity issues; high-tech firms (search for similar items in EconPapers)
JEL-codes: G21 G32 O31 O32 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-cse, nep-ino, nep-knm, nep-sbm and nep-tid
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_978_14

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