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The importance of equity finance for R&;D activity
Authors:Elisabeth Müller  Volker Zimmermann
Institution:(1) Industrial Economics and International Management, Centre for European Economic Research (ZEW), 68161 Mannheim, Germany;(2) Economic Research, KfW Bankengruppe, 60325 Frankfurt am Main, Germany
Abstract:This article analyzes the importance of equity finance for the R&D activity of small- and medium-sized enterprises. We use information on almost 6,000 German SMEs from a company survey. Using the intensity of banking competition at the district level as an instrument to control for endogeneity, we find that a higher equity ratio is conducive to a higher R&D intensity. Owners may only start R&D activities if they have the financial resources to sustain them until successful completion. We find a larger influence of the equity ratio for young companies. Equity may be more important for young companies which have to rely on the original equity investment of their owners since they have not yet accumulated retained earnings and can rely less on bank financing.
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