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Review of Finance Advance Access published online on September 28, 2009
Review of Finance, doi:10.1093/rof/rfp020
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The Authors 2009. Published by Oxford University Press on behalf of the European Finance Association. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

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

Enrique Schroth1 and Dezsö Szalay2

1 Finance Group, University of Amsterdam
2 Department of Economics, University of Bonn

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.

JEL Classification: G24, G32, L13

* We would like to thank Sudipto Bhattacharya, Bronwyn Hall, Martin Hellwig, Robert Hunt, Vojislav Maksimovic, Benny Moldovanu, Tiago Ribeiro, Kurt Schmidheiny, Armin Schmutzler, Margaret Slade, Elu Von Thadden, Mike Waterson, An Yan and seminar audiences at the Universities of Frankfurt, Zürich and Lausanne, the 2007 AEA Meetings (Chicago), the 2007 ESSFM (Gerzensee), the 2006 FIRS Meetings (Shanghai) and the 2005 GAEL IO and Innovaiton Conference (Grenoble).


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