ABSTRACT
This chapter argues that information asymmetry introduces a capital markets constraint on emerging firms making them more dependent on internal capital as a means of accessing strategic growth opportunities. Access to internally generated funds is thus a binding constraint for emerging firms and not for matures firms. The chapter hypothesizes that due to the nature of the basic R&D investments, capital expenditure is an essential price to pay in order to produce the product and capture the expected benefits resulting from the success of the R&D investments. Cross-sectional regressions, year-by-year and across firms, are conducted to analyze the linear form of the growth function. The chapter presents the results for each year, rather than manipulating time-series averages, in line with Stulz’s (1990) suggestion that the distribution of cash flows matters to shareholders period-by-period because shareholders want to optimize resources under managerial control each period to maximize their wealth.
