Discussion paper

DP12433 Firm R&D and Financial Analysis: How Do They Interact?

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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Citation

Peress, J and J Goldman (2017), ‘DP12433 Firm R&D and Financial Analysis: How Do They Interact?‘, CEPR Discussion Paper No. 12433. CEPR Press, Paris & London. https://cepr.org/publications/dp12433