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 high-tech 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.