Young innovative firms, investment-cash flow sensitivities and technological misallocation

Valencia-Arana, Oscar Mauricio; Gómez-González, José Eduardo; García-Suaza, Andrés Felipe

Young innovative firms, investment-cash flow sensitivities and technological misallocation

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Borradores de Economía; No. 1004

Date published

2017-06-12

Date

2017-06-12

Authors

Valencia-Arana, Oscar Mauricio
Gómez-González, José Eduardo
García-Suaza, Andrés Felipe

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

Can technological misallocation generate financial frictions? We build a theoretical model with testable implications, in which the misallocation between R&D and production activities generates borrowing constraints. The investor offers the innovator a rent that is contingent to the success of its project in order to make them exert an incentive-compatible effort level. However, this rent distorts the allocation of effort between activities. Specifically, it leads to a suboptimal level of effort impulsing a reallocation of resources from production to R&D. Consequently, the investor cannot appropriate the surplus resulting from innovation. This distortion increases the cost of external financing for firms that have large amount of intangible assets. Using Compustat data for manufacturing firms in the United States between 1982 and 2007, we show that cash-flow sensitivities are positive and increasing in firms with high R&D intensities.