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).

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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
Date:	May 2007
Number:	No.873
Number of Pages:	50
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
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URI:	http://wrap.warwick.ac.uk/id/eprint/125

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