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Debt Maturity and Innovation

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  • Yuliyan Mitkov

Abstract

The financing of innovative firms must balance two goals. On one hand, since innovation is inherently risky, the firm must receive adequate protection after failure to motivate innovative activity. At the same time, the firm must be liquidated when its assets can be redeployed more efficiently elsewhere. In this paper, I propose a theory of debt maturity as an incentive device to motivate innovation. I show how the firm’s optimal debt maturity is shaped by the possibility of debt renegotiations, the tangibility of its assets and the riskiness of its innovative project. The model predicts that innovative firms would lengthen their debt maturity when expecting to extract more concessions from their financiers once the project has started.

Suggested Citation

  • Yuliyan Mitkov, 2020. "Debt Maturity and Innovation," CRC TR 224 Discussion Paper Series crctr224_2020_191, University of Bonn and University of Mannheim, Germany.
    • Handle: RePEc:bon:boncrc:crctr224_2020_191
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    File URL: https://www.crctr224.de/research/discussion-papers/archive/dp191
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    More about this item

    Keywords

    Debt maturity; Innovation; Risk-taking; Renegotiation; Agency costs;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives

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