Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom





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    • Brown is from Montana State University and Fazzari and Petersen are from Washington University in St. Louis. This research has been generously supported by grants from the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University and a grant from the Washington University Center for Research on Innovation and Entrepreneurship funded by the Ewing Marion Kauffman Foundation. We thank the editor, Campbell Harvey, an anonymous associate editor, and two referees for many constructive comments. We also thank Raul Andrade, Jie Chen, and Jacek Suda for excellent research assistance. We are grateful for comments from Ross Andrese, Dino Falaschetti, and conference and seminar participants at the 2007 International Industrial Organization Conference, the 2007 Deutsche Bundesbank Kleist Villa Workshop, the Center for Finance and Credit Markets at the University of Nottingham, the Bank for International Settlements in Basel, Switzerland, and the Universities of Bergamo, Torino, and Trento, Italy.


The financing of R&D provides a potentially important channel to link finance and economic growth, but there is no direct evidence that financial effects are large enough to impact aggregate R&D. U.S. firms finance R&D from volatile sources: cash flow and stock issues. We estimate dynamic R&D models for high-tech firms and find significant effects of cash flow and external equity for young, but not mature, firms. The financial coefficients for young firms are large enough that finance supply shifts can explain most of the dramatic 1990s R&D boom, which implies a significant connection between finance, innovation, and growth.