Patents as quality signals? The implications for financing constraints on R&D

Information about the success of a new technology is usually held
asymmetrically between the research and development (R&D)-performing
firm and potential lenders and investors. This raises the cost of
capital for financing R&D externally, resulting in financing constraints
on R&D especially for firms with limited internal resources. Previous
literature provided evidence for start-up firms on the role of patents
as signals to investors, in particular to Venture Capitalists. This
study adds to previous insights by studying the effects of firms’
patenting activity on the degree of financing constraints on R&D for a
panel of established firms. The results show that patents do indeed
attenuate financing constraints for small firms where information
asymmetries may be particularly high and collateral value is low. Larger
firms are not only less subject to financing constraints, but also do
not seem to benefit from a patent quality signal.

Keywords: Patents, Quality Signal, Research and Development, Financial
Constraints, Innovation Policy