Financing Risk and Innovation

Financing Risk and Innovation

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Article ID: iaor20171234
Volume: 63
Issue: 4
Start Page Number: 901
End Page Number: 918
Publication Date: Mar 2017
Journal: Management Science
Authors: ,
Keywords: risk, innovation, investment
Abstract:

We provide a model of investment in new ventures that demonstrates why some places, times, and industries should be associated with a greater degree of experimentation by investors. Investors respond to financing risk, a forecast of limited future funding, by modifying their focus to finance less innovative firms. In equilibrium, financing risk disproportionately impacts innovative ventures with the greatest real option value by creating a trade‐off between protecting the firm from financing risk and maximizing its real option value. We propose that extremely novel technologies may need ‘hot’ financial markets to get through the initial period of discovery or diffusion. This paper was accepted by Gustavo Manso, finance.

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