Does Science Make a Difference? Investment, Finance and Corporate Governance in German Industries

This paper examines the impact of industry knowledge conditions, firm size and corporate governance structures on tangible investment and its financing. Based on a large panel data set of German firms we investigate whether liquidity constraints vary systematically across firms engaged in activities reflecting very different knowledge conditions. In particular, we compare the extent of liquidity constraints in science-based firms with non science-based firms. This distinction is important because science-based firms generally fit the characteristics of market failure identified by Kenneth Arrow. Science-based economic activity is subject to high uncertainty, asymmetric information and non-exclusiveness of newly created knowledge so liquidity constraints might be severe. Surprisingly, science seems to make a difference in that firms in science-based industries are less liquidity constrained than are their non science-based counterparts. However, firm size and governance structures play an important role. After accounting for firm size and the mode of corporate governance, we observe that the large owner-controlled firms in both scienceand non science-based industries are most liquidity constrained.