Financial Dependence and Innovation
The Harvard Law School Forum on Corporate Governance and Financial Regulation 2014-07-02
While innovation is crucial for businesses to gain strategic advantage over competitors, financing innovation tends to be difficult because of uncertainty and information asymmetry associated with innovative activities (Hall and Lerner (2010)). Firms with innovative opportunities often lack capital. Stock markets can provide various benefits as a source of external capital by reducing asymmetric information, lowering the cost of capital, as well as enabling innovation in firms (Rajan (2012)). Given the increasing dependence of young firms on public equity to finance their R&D (Brown et al. (2009)), understanding the relation between innovation and a firm’s financial dependence is a vital but under-explored research question. In our paper, Financial Dependence and Innovation: The Case of Public versus Private Firms, which was recently made publicly available on SSRN, we fill this gap in the literature by investigating how innovation depends on the access to stock market financing and the need for external capital.