ABSTRACT
The efficient allocation of funds among projects or firms can be severely limited by informational problems. Himmelberg and Petersen concentrate their analysis on a short panel of US small firms in high-tech (H-T) industries and find that research and development expenditure is positively and significantly related to the firm's cash flow. The probit model shows that H-T firms are more likely to be constrained in credit markets than firms undertaking traditional investment projects. This suggests that the sensitivity of R&D to the firm's cash flow found in the literature reflects severe obstacles in the access to credit by firms undertaking innovative investment rather than unobserved expectations. The idea that information problems may be more severe when a financial intermediary is faced with a H-T-high-risk firm carries the implication that banks are prone to cut credit to the most innovative firms in the economy.
