How to Fill the Gap Between Knowledge and Innovation
Edited by Jean Bonnet, Domingo García Pérez De Lima and Howard Van Auken
Chapter 4: Role of Information in the Debt Financing of Technology-based Firms in Spain
Ginés Hernández-Cánovas, Antonia Madrid-Guijarro and Howard Van Auken 4.1 INTRODUCTION Capital structure theory states that owners should select a financing mix that minimizes the firm’s overall cost of capital by identifying the optimal levels of equity and debt capital. While appropriate for firms having great access to the capital markets, the capital acquisition by technology-based firms may not be consistent with wealth maximization due to numerous market-related constraints (Ang, 1992; Petty and Bygrave, 1993). Issues such as high risk, unproven markets, motivation of owners, lead-time on product development, limited asset base, intellectual property rights and limited experience with raising capital by the owners often present important constraints on the ability of technologybased firms to raise capital. As a consequence, these firms are often faced with a limited set of choices that may limit their ability to achieve a minimum cost of capital. The above problems would be mitigated assuming a free flow of information between users and providers of capital (Brigham and Ehrhardt, 2007). However, obstacles confronting technology-based firms in their search for capital have been attributed to high agency costs that result from asymmetric information between the firm and investors (Carter and Van Auken, 1992; Landstrom, 1992). In this environment banks have an informational advantage over other providers of capital because they make higher investments in screening and monitoring technologies to reduce informational asymmetries. Since technological-based firms lack reliable quantitative information, much of banks’ competitive advantage comes from their ability to gather soft or qualitative information...
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