Optimal Financing for R&D-Intensive Firms

@inproceedings{Thakor2017OptimalFF,
  title={Optimal Financing for R&D-Intensive Firms},
  author={Richard Todd Thakor and Andrew W Lo},
  year={2017}
}
We develop a theory of optimal financing for R&D-intensive firms. With only market financing, the firm relies exclusively on equity financing and carries excess cash, but underinvests in R&D. We use mechanism design to examine how intermediated financing can attentuate this underinvestment. The mechanism combines equity with put options such that investors insure firms against R&D failure and firms insure investors against high R&D payoffs not being realized. 

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