No. 978 - Does issuing equities help R&D activity? Evidence from unlisted Italian high-tech manufacturing firms

This paper evaluates the causal effect of issuing equities on the probability that a firm will engage in R&D activity. Equity is a preferable source of external finance for innovation than debt. It does not require collateral, does not exacerbate moral hazard problems connected with the substitution of high-risk for low-risk projects, quite common when using debt, and, unlike debt, does not increase the probability of bankruptcy; equity also allows investors to reap the entire benefit of returns on successful innovative projects. The paper focuses on hightech firms for which asymmetric information problems are more pervasive. Implementing an instrumental variable estimation, we find that issuing equity increases the probability of the firm making R&D expenditure by 30-40 per cent. We detect considerable heterogeneity across firms: the impact of issuing equity is significant only for small, young, and more highly leveraged firms. We also find interesting evidence that issuing equity increases R&D expenditure in relation to sales.