High-tech firms and credit rationing

Informational frictions between borrowers and lenders differ across classes of borrowers. Innovative firms undertake high-risk-high-return projects which are likely to be little understood by financial intermediaries. As a consequence, they may end-up allocating too large a share of funds to traditional, low-risk-low-return projects. This proposition finds some support in a cross-section of Italian manufacturing firms. Using several proxies to classify firms into high-tech and low-tech groups and direct information on each firm's access to bank credit, high-tech firms are found to be more likely to be credit-constrained than low-tech firms. The results suggest that the responsiveness of R&D expenditure to cash flow found in the literature is likely due to pervasive credit constraints on innovative firms rather than to cash flow proxying for future expectations. The paper also sheds light on the main factors affecting the probability of a firm being rationed in the credit market. Published by Elsevier Science B.V.