Abstract
Highly innovative firms face unique financing constraints because there is often a greater degree of information asymmetry between firms and potential lenders. Prior literature indicates that patents provide a quality signal to external investors that potentially help mitigate internal liquidity constraints. In this paper, we study the joint impact of firms’ patent stocks and operating profit margin, which acts as a proxy for internal funds, on R&D expenditures in a panel of the top 2000 corporate R&D performers worldwide. We find that patenting activity lessens the impact of negative internal liquidity shocks on innovation for relatively smaller firms. In contrast, patenting activity does not have an attenuating effect for relatively larger firms. The results are consistent for high and medium-high technology firms and are robust to country specific controls.
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