Microeconometric evidence of financing frictions and innovative activity
Amaresh Tiwari, Pierre Mohnen, Franz Palm & Sybrand Schim van der Loeff
#2012-062
Using a unique panel data of Dutch innovation and financial variables we
empirically investigate how financing and innovation vary across firm
characteristics. The study also tries to gauge the extent of market
failure due to the presence of financing frictions. Our main findings
can be summarized as follows. First, when firms face endogenous
financial constraints, debt financing and innovation choices are not
independent of firm characteristics such as age, size, and existing
leverage. In the absence of financial constraints, however, firms,
almost uniformly across firm characteristics, become less inclined - as
compared to firms facing constraints - to engage in innovative activity
by raising debt. Second, small, young, highly leveraged, and firms with
lower collateralizable assets are more likely to be financially
constrained. Third, large, young, and low leveraged firms are more
likely to be innovators. Fourth, financial constraints adversely affect
a firm’s R&D intensity. Fifth, smaller and younger firms are more R&D
intensive. A new estimator, that combines the method of "Correlated
Random Effects" and "Control Function" to account for the endogeneity of
regressors in a structural equations model, is developed.
JEL Classification: G30, O30, C30
Key Words: Financial Constraints, Capital Structure, R&D, Innovation,
Firm Characteristics, Panel Data, Correlated Random Effects, Control
Function, Expected a Posteriori