Discussion Paper Details

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Title: Firm R&D and Financial Analysis: How Do They Interact?

Author(s): Jim Goldman and JoŽl Peress

Publication Date: November 2017

Keyword(s): capital allocation, Financial Development, growth, Innovation, learning and technological progress

Programme Area(s): Financial Economics

Abstract: Entrepreneurs undertake more R&D when financiers are better informed about their projects because they expect to receive more funding for successful projects. Conversely, financiers learn more about projects when entrepreneurs perform more R&D because then the opportunity cost of mis-investing is higher. Thus R&D and financial analysis are mutually reinforcing. Evidence based on two quasi-natural experiments supports this interaction. Quantitatively, investors' learning accounts for over a quarter of the total effect of a policy designed to stimulate R&D. A calibration suggests that the interaction's contribution to income growth represents a third of the total contributions of learning and R&D.

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Bibliographic Reference

Goldman, J and Peress, J. 2017. 'Firm R&D and Financial Analysis: How Do They Interact?'. London, Centre for Economic Policy Research.