Patents as Quality Signals? The Implications for Financing Constraints on R&D

36 Pages Posted: 17 Apr 2014

See all articles by Dirk Czarnitzki

Dirk Czarnitzki

KU Leuven - Department of Managerial Economics, Strategy, and Innovation; Centre for European Economic Research (ZEW)

Bronwyn H. Hall

University of California at Berkeley; National Bureau of Economic Research (NBER); Institute for Fiscal Studies (IFS); Max Planck Institute for Innovation and Competition

Hanna Hottenrott

Technische Universität München (TUM)

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Date Written: February 15, 2014

Abstract

Information about the success of a new technology is usually held asymmetrically between the research and development (R&D)-performing firm and potential lenders and investors. This raises the cost of capital for financing R&D externally, resulting in financing constraints on R&D especially for firms with limited internal resources. Previous literature provided evidence for start-up firms on the role of patents as signals to investors, in particular to Venture Capitalists. This study adds to previous insights by studying the effects of firms' patenting activity on the degree of financing constraints on R&D for a panel of established firms. The results show that patents do indeed attenuate financing constraints for small firms where information asymmetries may be particularly high and collateral value is low. Larger firms are not only less subject to financing constraints, but also do not seem to benefit from a patent quality signal.

Keywords: Patents, Quality Signal, Research and Development, Financial Constraints, Innovation Policy

JEL Classification: O31, O32, O38

Suggested Citation

Czarnitzki, Dirk and Hall, Bronwyn H. and Hottenrott, Hanna, Patents as Quality Signals? The Implications for Financing Constraints on R&D (February 15, 2014). ZEW - Centre for European Economic Research Discussion Paper No. 14-023, Available at SSRN: https://ssrn.com/abstract=2426072 or http://dx.doi.org/10.2139/ssrn.2426072

Dirk Czarnitzki (Contact Author)

KU Leuven - Department of Managerial Economics, Strategy, and Innovation ( email )

Naamsestraat 69 bus 3500
Leuven, 3000
Belgium

Centre for European Economic Research (ZEW) ( email )

P.O. Box 10 34 43
Mannheim, 68034
Germany

Bronwyn H. Hall

University of California at Berkeley ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

HOME PAGE: http://emlab.berkeley.edu/users/bhhall/index.html

National Bureau of Economic Research (NBER)

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Institute for Fiscal Studies (IFS)

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London, WC1E 7AE
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Max Planck Institute for Innovation and Competition

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Munich, Bayern 80539
Germany

Hanna Hottenrott

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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