Capital Market Imperfections, High‐Tech Investment, and New Equity Financing

Mondragone International Economic Seminar for many valuable comments and suggestions. We also thank Lauren Lax for excellent research assistance and Dorothy Petersen for technical assistance. ABSTRACT: Highly variable returns, asymmetric information and a lack of collateral should cause small high-tech firms to have poor access to debt. New equity financing has several advantages over debt, but may be costly compared to internal finance. We examine an unbalanced panel of over 2,400 publicly traded United States high-tech companies over the period 1981 to 1998. Most small high-tech firms obtain little debt financing. New equity financing, in the form of the initial public offering, is very important and permits a major increase in firm size. After going public, comparatively few firms make heavy use of external financing.

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