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The financing decisions of innovative firms

The financing decisions of innovative firms
The financing decisions of innovative firms
The paper examines the relation between forms of financing and the level of expenditure on research and development (R&D). The paper shows that the probability of issuing new equity rises monotonically with the level of expenditure on R&D, whilst the use of debt finance follows an inverted U curve, rising and then falling as R&D expenditure rises. The analysis confirms ‘control rights’ theories of financing, in which firms follow an established hierarchy of preferences for modes of financing, with debt preferred to equity since it involves less loss of control rights. The mode of financing is linked to characteristic types of innovation, with debt financing associated with incremental innovation and equity funding with R&D intensive innovation, as in pharmaceuticals. The paper concludes by suggesting a linkage between modes of financing, types of innovation and business systems, with the UK's innovation pattern linked to market financing contrasting with the relationship financing of bank oriented systems such as Germany.

innovation, finance, debt, equity, uk firm data
0275-5319
208-221
Casson, P.D.
5ac137b1-dc94-41fb-82c5-736ad5be75c2
Martin, R.
056af022-7532-4352-966e-24a8117d728e
Nisar, T.M.
6b1513b5-23d1-4151-8dd2-9f6eaa6ea3a6
Casson, P.D.
5ac137b1-dc94-41fb-82c5-736ad5be75c2
Martin, R.
056af022-7532-4352-966e-24a8117d728e
Nisar, T.M.
6b1513b5-23d1-4151-8dd2-9f6eaa6ea3a6

Casson, P.D., Martin, R. and Nisar, T.M. (2008) The financing decisions of innovative firms. Research in International Business and Finance, 22 (2), 208-221. (doi:10.1016/j.ribaf.2007.05.001).

Record type: Article

Abstract

The paper examines the relation between forms of financing and the level of expenditure on research and development (R&D). The paper shows that the probability of issuing new equity rises monotonically with the level of expenditure on R&D, whilst the use of debt finance follows an inverted U curve, rising and then falling as R&D expenditure rises. The analysis confirms ‘control rights’ theories of financing, in which firms follow an established hierarchy of preferences for modes of financing, with debt preferred to equity since it involves less loss of control rights. The mode of financing is linked to characteristic types of innovation, with debt financing associated with incremental innovation and equity funding with R&D intensive innovation, as in pharmaceuticals. The paper concludes by suggesting a linkage between modes of financing, types of innovation and business systems, with the UK's innovation pattern linked to market financing contrasting with the relationship financing of bank oriented systems such as Germany.

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More information

e-pub ahead of print date: 18 May 2007
Published date: June 2008
Keywords: innovation, finance, debt, equity, uk firm data

Identifiers

Local EPrints ID: 45615
URI: https://eprints.soton.ac.uk/id/eprint/45615
ISSN: 0275-5319
PURE UUID: 720471b5-5c1b-4e79-acf9-1e1e970f9aa0

Catalogue record

Date deposited: 29 Aug 2008
Last modified: 13 Mar 2019 21:05

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Contributors

Author: P.D. Casson
Author: R. Martin
Author: T.M. Nisar

University divisions

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