7 A novel finding in this paper and a companion paper by J Brown and Petersen

7 a novel finding in this paper and a companion paper

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7 A novel finding in this paper and a companion paper by J. Brown and Petersen (2009) is the increased importance of public-equity issuance in financing R&D in the United States, which doubtless reflects a shift in expectations on the part of investors during this period that lowered the cost of this kind of capital to the firm. Harhoff (1998) find weak but significant cash-flow effects on R&D for both small and large German firms, although Euler-equation estimates for R&D investment were uninformative due to the smoothness of R&D and the small sample size. Combining limited survey evidence with his regression results, he concludes that R&D investment in small German firms may be constrained by the availability of finance. Bond et al. (1999) find significant differences between the cash flow impacts on R&D and investment for large manufacturing firms in the United Kingdom and Germany. German firms in their sample are insensitive to cash flow shocks, whereas the investment of non-R&D-doing UK firms does respond. Cash flow helps to predict whether a UK firm does R&D, but not the level of that R&D. They interpret their findings to mean that financial constraints are important for British firms, but that those which do R&D are a self-selected group that face fewer constraints. This is consistent with the view that the desire of firms to smooth R&D over time combines with the relatively high cost of financing it to reduce R&D well below the level that would obtain in a frictionless world. That is, some firms do not find it worthwhile to begin an R&D program that they expect will have to be curtailed in the future due to financial constraints. Mulkay et al. (2001) perform a similar exercise using large French and US manufacturing firms, finding that cash-flow impacts are much larger in the US than in France, both for R&D and for ordinary investment. Except for the well-known fact that R&D exhibits higher serial correlation than investment (presumably because of higher adjustment costs), differences in behaviour are between countries, not between investment types, suggesting that they are due to differences in the structure of financial markets rather than the type of investment, tangible or intangible. This result is consistent with evidence reported in Hall et al. (1999) for the US, France, and Japan during an earlier time period, which basically finds that R&D and investment on the one hand, and sales and cash flow on the other, are simultaneously determined in the United States (neither one “Granger-causes” the other). 8 In the other countries, however, both types of investment are causal for sales and cash flow, with little feedback from sales 7 The Euler equation for investment is an equilibrium condition derived from the firm’s value maximization problem. It expresses the tradeoff between investing today and having one more period of production from the capital versus investing tomorrow and forgoing today’s production. 8 Granger causality is a definition of causality in a time-series context that is due to the late Clive Granger. One variable
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