The financing of small innovative firms: the Italian case

Small firms encounter difficulties in collecting external finance due to greater information problems. For small innovative firms, whose activity is more difficult to evaluate, the cost of external finance could be even higher. This paper aims to shed light on special features in financial structures of small innovative firms, compared with firms of similar size that do not innovate. The evidence shows that small innovators rely less on financial debts and more on internal financial resources; no important differences appear for large firms. This is consistent with the view that information problems mainly affect small firms. Another finding is that small innovative firms show a lower investment sensitivity to cash flow than small non-innovative firms: it is likely that the high incidence of internal financial resources allows them more flexibility in deciding their investments. No difference in investment sensitivity to cash flow, by innovative attitude, is found for large firms.