Abstract
We show that financial constraints may benefit innovation by improving the efficiency of innovative activities. We measure firm-level innovative efficiency by patents (or patent citations) scaled by R&D (research and development) investment or the number of employees, and find that financial constraints are positively associated with innovative efficiency. Tests using the 1989 junk bond crisis as an exogenous shock to financial constraints suggest a causal interpretation for the link. Consistent with agency problems, the positive effect of financial constraints on innovative efficiency is stronger among firms with high excess cash holdings and low investment opportunities, and among firms in less competitive industries. Financial constraints appear to mitigate free cash flow problems that induce firms to make unproductive R&D investment in fields out of their direct expertise. Our findings point to a bright side of the role of financial constraints for corporate investment in intangible assets.
Sign-in/Register to access full text options 
Free) 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a call
