Patents as Quality Signals? The Implications for Financing Constraints on R&D

Publication date: 2 Jul 2014 | Publication type: NIESR Discussion Paper | NIESR Author(s): Hall, B | External Author(s): Dirk Czarnitzki; Hanna Hottenrott | JEL Classification: O31, O32, O38 | NIESR Discussion Paper Number: 430

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.


Corresponding author:

Hanna Hottenrott, Düsseldorf Institute for Competition Economics (DICE), Heinrich Heine University, Universitätsstrasse 1, 40225 Düsseldorf. Email: hottenrott [at]; Tel : +49 211 81-10266 | Fax: + 49 211 81-15499

Keyword tags: 
quality signal
research and development
financial constraints
innovation policy