Debt Maturity and Innovation

Yuliyan Mitkov ()

CRC TR 224 Discussion Paper Series from University of Bonn and University of Mannheim, Germany

Abstract: The financing of innovative firms must balance two goals. On one hand, since innovation is inherently risky, the firm must receive adequate protection after failure to motivate innovative activity. At the same time, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. In this paper, I propose a theory of debt maturity as an incentive device to motivate innovation. I show how the firm’s optimal debt maturity is shaped by the possibility of debt renegotiations, the tangibility of its assets and the riskiness of its innovative project. The model predicts that innovative firms would lengthen their debt maturity when expecting to extract more concessions from their financiers once the project has started.

Keywords: Debt maturity; Innovation; Risk-taking; Renegotiation; Agency costs (search for similar items in EconPapers)
JEL-codes: G24 G32 G33 O31 (search for similar items in EconPapers)
Pages: 41
Date: 2020-07
New Economics Papers: this item is included in nep-cfn and nep-sbm
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Persistent link: https://EconPapers.repec.org/RePEc:bon:boncrc:crctr224_2020_191

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