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Cash Breeds Success: The Role of Financing Constraints in Patent Races

Schroth, E. and Szalay, D. (2010). Cash Breeds Success: The Role of Financing Constraints in Patent Races. Review of Finance, 14(1), pp. 73-118. doi: 10.1093/rof/rfp020

Abstract

This paper studies the impact of financing constraints in patent races. We develop a model of optimal contracting where firms finance their R&D expenditures with an investor who cannot verify their effort. In equilibrium, firms are more likely to win the more cash and assets they hold prior to the race, and the less cash and assets their rivals hold prior to the race. Evidence from US pharmaceutical patents awarded between 1975 and 1999 supports our theoretical predictions.

Publication Type: Article
Additional Information: This is a pre-copyedited, author-produced PDF of an article accepted for publication in Review of Finance following peer review. The version of record Schroth, E. & Szalay, D. (2010). Cash Breeds Success: The Role of Financing Constraints in Patent Races. Review of Finance, 14(1), pp. 73-118. is available online at: http://dx.doi.org/10.1093/rof/rfp020
Subjects: H Social Sciences > HG Finance
Departments: Cass Business School > Finance
URI: http://openaccess.city.ac.uk/id/eprint/13995
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