Does innovation success reduce the cost of financing? Evidence from private investments in public equity

Abstract

This paper investigates the relation between a firm's innovation performance and the cost of financing in private investments in public equity (PIPEs). Using patent-based metric data, I find that innovative firms issue securities in private equity placements at a 5.4% lower discount than non-innovative firms. The negative effect of innovation performance on PIPE discounts is more pronounced for firms in R&D intensive industries and firms with higher stock market illiquidity. Channel tests show that innovative firms are more likely to be led by strategic investors who are willing to pay a higher price to support innovative issuers. The results are robust to alternative methods that mitigate endogeneity issues.