Because Innovation requires the commitment of resources to a development with highly uncertain net returns, the methodology of financial economics Is useful In understanding innovation, even to the point of suggesting a relationship between the Incidence and rate of Innovation and the state of key financial factors. Our model posits such a relationship, grouping the key financial factors under the headings of investment valuation and financing: the fundamental components of financial economics. The model argues that the incidence and rate of innovation are related to both valuation and financing factors as well as the Interactions between them. We present a structure for this model and suggest a LISREL methodology for empirically testing these financial factors.
Get full access to this article
View all access options for this article.
References
1.
AltmanE. (1968). Financial ratios, discriminant analysis and the prediction of corporate bankruptcy.Journal of Finance, 23(4), 589–609.
2.
ArrowK. (1990). Essays in risk bearing.Amsterdam: North Holland.
3.
BarneaA., HaugenR., & SenbetL. (1981). Market imperfections, agency problems and capital structure: A review.Financial Management, Summer, 7–22.
4.
BeyR. (1983). Capital budgeting decisions when cash flows and project lives are stochastic and dependent.Journals of Financial Research, 6, 175–187.
5.
BlackF. (1973). The pricing of options and corporate liabilities.Journal of Political Economy, 81, 637–654.
6.
BrighamE., & GapenskiL. (1991). Financial management: Theory and practice.New York: Dryden Press.
7.
BrownD. (1978). The rate of return of selected investment projects.Journal of Finance, 33, 1250–1253.
8.
BrophyD., & ShulmanJ. (1992). A finance perspective on entrepreneurship research.Entrepreneurship Theory and Practice, 16(3), 61–71.
9.
BygraveW., & ShulmanJ. (1989). Capital gains tax rates: Bane or boon for venture capital. In BrockhausR. H.Sr., ChurchillN. C., KatzJ. A., KirchoffB. A., VesperK. H., & WetzelW. E.Jr., (Eds.), Frontiers of entrepreneurship research, pp. 324–338. Wellesley, MA: Babson College.
10.
ChurchillN., & LewisV. (1983). The five stages of small business growth.Harvard Business Review, June, 30–50.
11.
DambolenaI., & ShulmanJ. (1988). A primary rule of bankruptcy: Watch the cash.Financial Analysts Journal, September/October, 66–70.
12.
EckboE. (1983). Horizontal mergers, collusion and stockholder wealth.Journal of Financial Economics, 11(April), 241–273.
13.
FamaE. (1970). Efficient capital markets: A review of theory and empirical work.Journal of Finance, 25, 383–417.
14.
FamaE. (1972). Components of investment performance.Journal of Finance, 27, 551–567.
15.
FamaE. (1977). Risk-adjusted discount rates and capital budgeting under uncertainty.Journal of Financial Economics, 5, 3–24.
16.
GentryJ., NewboldP., & WhitfordD. (1985). Predicting bankruptcy: If cash flow's not the bottom line, what is?Financial Analysts Journal, September/October, 47–56.
17.
GitmanL., & MercurioV. (1982). Cost of capital techniques used by major US firms.Financial Management, 11(Winter), 21–29.
18.
HirshleiferJ. (1958). On the theory of optimal investment decision.Journal of Political Economy, 66(August), 95–103.
19.
JamesC. (1987). Some evidence on the uniqueness of bank loans.Journal of Financial Economics, 2(3), 217–235.
20.
JensenM. (1986). Agency costs of free cash flow, corporate finance and takeovers.American Economic Review, May, 322–329.
21.
JensenM., & MecklingW. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure.Journal of Financial Economics, 3, 305–360.
22.
JensenM., & RubackR. (1983). The market for corporate control: The scientific evidence.Journal of Financial Economics, 11, 5–50.
23.
JoreskogK., & SorbomD. (1984). LISREL VI: Analysis of linear structural relationships by maximum likelihood, instrumental variables and least squares methods.Mooresville, IN: Scientific Software, Inc.
24.
LintnerJ. (1965). Security prices, risk and maximal gains from diversification.Journal of Finance, 20, 587–616.
25.
McConnellJ., & MuscarellaC. (1985). Corporate capital expenditure decisions and the market value of the firm.Journal of Financial Economics, 14, 399–422.
26.
MillerE. (1978). Uncertainty induced bias in capital budgeting.Financial Management, 7(Autumn), 12–18.
27.
MillerM. (1977). Debt and taxes.Journal of Finance, 32, 261–278.
28.
ModiglianiF., & MillerM. (1958). The cost of capital, corporation finance and the theory of investment.American Economic Review, 48, 261–297.
29.
ModiglianiF., & PogueG. (1974). An introduction to risk and return.Financial Analysts Journal, 30(March-April), 68–80.
30.
MyersS., & MajlufN. (1984). Corporate financing and investment decisions when firms have information that investors do not have.Journal of Financial Economics, June, 187–222.
31.
MyersS., & TurnballS. (1977). Capital budgeting and the capital asset pricing model: Good news and the bad news.Journal of Finance, 32, 321–332.
32.
NelsonC. (1976). Inflation and capital budgeting.Journal of Finance, 31, 923–931.
33.
PetersonR., & ShulmanJ. (1987/1988. Capital structure of growing firms: A 12-country study on becoming bankable.International Small Business Journal, 5(4), 10–22.
34.
PetitR., & SingerR. (1985). Small business finance: A research agenda.Financial Management, Autumn, 47–60.
35.
PorterM. (1985). Competitive advantage.New York: The Free Press.
36.
PrattJ. (1964). Risk aversion in the small and in the large.Econometrica, 32(January-April), 122–136.
37.
RichardsV., & LauglinE. (1980). A cash conversion cycle approach to liquidity analysis.Financial Management, 32–38.
38.
RossS. (1976). The arbitrage theory of capital asset pricing.Journal of Economic Theory, 13, 341–360.
39.
SahlmanW. (1988). Aspects of financial contracting in venture capital.Journal of Applied Corporate Finance, Summer, 23–36.
40.
SahlmanW. (1990). The structure and governance of venture-capital organizations.Journal of Financial Economics, 27, 473–521.
41.
SharpeW. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk.Journal of Finance, 19, 425–442.
42.
SmidtS. (1979). A Bayesian analysis of project selection and of post audit evaluations.Journal of Finance, 34, 675–688.
43.
StevensonH., RobertsM., & GrousbeckH. (1985). New business ventures and the entrepreneur.Homewood, IL: Richard D. Irwin.
TatomJ., & TurleyJ. (1978). Inflation and taxes: Disincentives for capital formation.Review of the Federal Reserve Bank of St. Louis, 60(January), 2–8.
46.
TeichroewD., RobichekA., & MontalbanoM. (1965). An analysis of criteria for investment and financing decisions under certainty.Management Science, 12(November), 151–179.
47.
Van HomeJ. (1972). Capital budgeting under conditions of uncertainty as to project life.Engineering Economist, 17(Spring), 189–199.
48.
Van HomeJ. (1991). Financial management and policy.Englewoods Cliff, NJ: Prentice Hall.
49.
WetzelW. (1987). The informal venture capital market: Aspects of scale and market efficiency.Journal of Business Venturing, 2, 299–314.
