The Effects of Private Investments in Public Equity on R&D Investment in Small and Medium-Size Enterprises

This paper provides evidence that small and medium-size enterprises (SMEs) use a portion of private investments in public equity (PIPEs) for current research and development (R&D) investment, hold the rest in liquidity reserves such as cash assets and working capital, and ultimately use these reserves to smooth R&D investment. That is, PIPEs may have a direct effect on R&D investment and an indirect or smoothing effect using liquidity reserves. This paper also shows that innovative SMEs such as venture businesses, inno-biz firms, and management innovative firms are more likely to use PIPEs for R&D investment than are noninnovative SMEs. The implications of this paper are that PIPEs can be used as an important source of external financing to fund R&D investment and can be particularly valuable for R&D investment in innovative SMEs.