Arm's Length Financing and Innovation: Evidence from Publicly Traded Firms

Using a large panel of U.S. companies, I document that firms that rely more on arm’s length financing, such

as public debt and equity, innovate more and have higher-quality innovations than firms that use other

sources, such as relationship-based bank financing. I hypothesize that one possible reason for this finding is the

greater flexibility and tolerance to experimentation associated with arm’s length financing. I find support for this

hypothesis by showing that firms with more arm’s length financing have greater volatility of innovative output,

and are more likely to innovate in new technological areas. Furthermore, focusing only on bank financing,

I demonstrate that firms have more novel innovations if they borrow from multiple banks, use predominantly

credit lines, and have less intense covenants. I address potential endogeneity concerns by using instrumental

variable analysis, and by showing that innovation increases significantly after new public debt offerings and

seasoned equity offerings, but does not change after new bank loans.

Publication Information
Article Title: Arm's Length Financing and Innovation: Evidence from Publicly Traded Firms
Journal: Management Science (2016)
Author(s): Atanassov , Julian
Researcher Information
Atanassov, Julian
Atanassov, Julian
Associate Professor
  • Boards of Directors
  • Corporate Finance
  • Corporate Governance
  • Corporate Social Responsibility
  • Tax Policy
CoB 425Q
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University of Nebraska-Lincoln
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