Internal Capital Markets and Patenting in Emerging Growth Firms

  •  Richard Ottoo    
  •  Maurice Larrain    
  •  Anthony Joseph    


Despite the overwhelming theoretical intuition in support of the arguments that internally generated capital should be an important determinant of corporate innovation, very little empirical evidence of this association has been established. In this paper we show that internal capital markets have a positive and significant relationship with patenting of emerging firms. However, for mature firms, the relationship between internal finance and patenting is negative but not significant. Our empirical analysis is grounded on the theoretical modeling of granting a patent as the maturity date of an American real call option, with internal capital and R&D expenses serving to shorten the maturity of the growth option and to speed up innovation.


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