The continuous generation of innovative products, processes and services is widely considered to be the primary key to firms’ competitiveness and growth. The major input in this innovation process is unique knowledge generated by investments in research and development (R&D). Interestingly enough, though, private firms have found it extremely difficult to obtain external capital for funding such crucial investments into their future. Banks as the main provider of external funds for the vast majority of firms seem ill-equipped to provide the necessary funding. Their shortcomings are typically explained by the nature of R&D projects, which suffer from both information imperfections and asymmetries. We adopt a novel perspective by challenging the dominant assumption that all banks are equally subject to suffering from information asymmetries in financing private R&D. We suggest that firms can signal the value of their R&D investment and overcome the inherent information asymmetries. We focus on two mechanisms for signaling. On the one hand, firms can signal based on past innovation success. We will rely on firm’s patent stock to measure this. On the other hand, firms can signal based on relations with trusted external actors such as a joint venture investor or the government (through a subsidy). We consider all of these mechanisms and allow for heterogeneities across industries and banks in the valuation of the signals. We test this theoretical framework empirically for more than 7,000 firm observations on R&D investments in Germany between 2002 and 2006. Unique access to the database of Germany’s leading credit rating agency on the population of German firms and their main bank relationship allows us to construct novel variables on the overall portfolio of the firm’s main bank. We have the rare opportunity to link this information to firm characteristics, R&D investment, patent statistics and venture capital investments based on a non-heuristic link. The empirical results corroborate our theoretical model only for the signaling value of firm’s patent stock. Firms can shift the threshold of a bank’s risk considerations to lower levels of specialization if they can signal the value of their R&D activities through successful patent activities. On the basis of these findings, implications are derived for academic research, management and policy making.
Höwer, Daniel, Tobias Schmidt and Wolfgang Sofka (2011), An Information Economics Perspective on Main Bank Relationships and Firm R&D, ZEW Discussion Paper No. 11-055, Mannheim. Download