The Library

Cash breeds success : the role of financing constraints in patent races

Tools

Schroth, Enrique and Szalay, Dezsö (2007) Cash breeds success : the role of financing constraints in patent races. Working Paper. Coventry: University of Warwick, Department of Economics. Warwick economic research papers (No.873).

Preview

PDF
WRAP_Szalay_cashinnraces.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Download (336Kb)

Official URL: http://www2.warwick.ac.uk/fac/soc/economics/staff/...

Abstract

This paper studies the impact of cash constraints on equilibrium winning probabilities in a patent race between an incumbent and an entrant. We develop a model
where cash-constrained firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, the incumbent faces better prospects of
winning the race the less cash-constrained he is and the more cash-constrained the
entrant is. We use NBER evidence from pharmaceutical patents awarded between
1975 and 1999 in the US, patent citations, and COMPUSTAT to measure the
effect of the incumbent's and entrants' cash holdings on the equilibrium winning
probabilities. The empirical findings support our theoretical predictions.

Item Type:

Working or Discussion Paper (Working Paper)

Subjects:

H Social Sciences > HG Finance
H Social Sciences > HB Economic Theory

Divisions:

Faculty of Social Sciences > Economics
Other > Learning and Development Centre

Library of Congress Subject Headings (LCSH):

Patents, Investment banking, Risk management

Series Name:

Warwick economic research papers

Publisher:

University of Warwick, Department of Economics

Place of Publication:

Coventry

Official Date:

May 2007

Dates:

Date	Event
May 2007	Published

Number:

No.873

Number of Pages:

Status:

Not Peer Reviewed

Access rights to Published version:

Open Access

References:

Blundell, Richard, Rachel Griffith, and John Van Reenen, .Market Share, Market
Value and Innovation in a Panel of British Manufacturing Firms,.Review of Economic
Studies, 1999, 66, 529.554.
Bolton, Patrick and David Scharfstein, .A Theory of Predation Based on Agency
Problems in Financial Contracting,.American Economic Review, 1990, 80 (1), 93.106.
Brander, James and Tracy Lewis, .Oligopoly and Financial Structure: The Limited
Liability Effect,.American Economic Review, 1986, 76 (5), 956.970.
Chevalier, Judith, .Capital Structure and Product-Market Competition: Empirical Evidence from the Supermarket Industry,.American Economic Review, 1995, 85 (3), 415.
435.
Cockburn, Iain and Rebecca Henderson, .Racing to Invest? The Dynamics of Competition in Ethical Drug Discovery,.Journal of Economics and Management Strategy,
1994, 3, 481.519.
Cohen, Wesley, Richard Nelson, and John Walsh, .Protecting Their Intellectual
Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or
Not),.2000. Working Paper No. 7552, NBER.
Davidson, Russell and James MacKinnon, Estimation and Inference in Econometrics,
New York, NY: Oxford University Press, 2004.
Fazzari, Steven, Glenn Hubbard, and Bruce Petersen, .Financing Constraints and
Corporate Investment,.Brookings Papers on Economic Activity, 1988, 1, 141.195.
Fudenberg, Drew and Jean Tirole, .A .Signal-Jamming.Theory of Predation,.RAND
Journal of Economics, 1986, 17 (3), 366.376.
Gale, Douglas and Martin Hellwig, .Incentive Compatible Debt Contracts: The One
Period Problem,.Review of Economic Studies, 1985, 52, 647.664.
Gilbert, Richard and David Newbery, .Preemptive Patenting and the Persistence of
Monopoly,.American Economic Review, 1982, 72, 514.526.
and , .Uncertain Innovation and the Persistence of Monopoly: Comment,.American Economic Review, 1984., 74, 238.242.
Hall, Bronwyn, .Investment and Research and Development at the Firm Level: Does
the Source of Financing Matter?,.1992. Working Paper No. 4096, National Bureau of
Economic Research.
, .Exploring the Patent Explosion,.2004. NBER Working Paper No 10605.
, Adam Jaffe, and Manuel Trajtenberg, .The NBER Patent-Citations Data File:
Lessons, Insights and Methodological Tools,.in Adam Jaffe and Manuel Trajtenberg,
eds., Patent, Citations and Innovations: A Window on the Knowledge Economy, MIT
Press, 2002, chapter 13, pp. 403.459.
, , and , .Market Value and Patent Citations,.RAND Journal of Economics,
2005, 36 (1), 16.38.
Hellman, Thomas and Manju Puri, .The Interaction Between Product Market and
Financing Strategy: The Role of Venture Capital,.The Review of Financial Studies,
2000, 13 (4), 959.984.
Himmelberg, Charles and Bruce Petersen, .R and D and Internal Finance: A Panel
Study of Small Firms in High-Tech Industries,. Review of Economics and Statistics,
1994, 76, 38.51.
Jensen, M. and W. Meckling, .Theory of the Firm: Managerial Behaviour, Agency
Costs and Ownership Structure,.Journal of Financial Economics, 1976, 3, 205.60.
Jensen, Richard and Dean Showalter, .Strategic Debt and Patent Races,.International
Journal of Industrial Organization, 2004, 22, 887.915.
Lerner, Josh, .An Empirical Exploration of a Technology Race,.RAND Journal of Economics, 1997, 28 (2), 228.247.
Levin, Richard, Alvin Kelvorick, Richard Nelson, and Sidney Winter, .Appropriating the Returns from Industrial Research and Development,.Brookings Papers on
Economic Activity, 1987, pp. 783.831.
Maksimovic, Vojislav, .Capital Structure in Repeated Oligopolies,. RAND Journal of
Economics, 1988, 19 (3), 389.407.
Mayer, Colin, .New Issues in Corporate Finance,.European Economic Review, 1988, 32,
1167.1188.
Milgrom, Paul and John Roberts, .Comparing Equilibria,.American Economic Review,
1994, 84, 441.459.
Reinganum, Jennifer, .Uncertain Innovation and the Persistence of Monopoly,.American
Economic Review, 1983, 73, 741.748.
, .Uncertain Innovation and the Persistence of Monopoly: A Reply,. American Economic Review, 1984, 74, 243.246.
Rotemberg, Julio and David Scharfstein, .Shareholder-Value Maximization and Product Market Competition,.Review of Financial Studies, 1990, 3, 367.391.
Schroth, Enrique and Dezsö Szalay, .Financial Contracting in Patent Races,. 2007.
Working paper, HEC Lausanne and Warwick University.
Trajtenberg, Manuel, Economic Analysis of Product Innovation - The Case of CT Scanners, Cambridge, MA: Harvard University Press, 1990.