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.