Innovation, financial constraints and credit rating scores

This manuscript investigates whether credit rating scores are a more appropriate measure to predict financial constraints of innovative firms than other common indexes proposed by the literature (e.g. Hadlock and Pierce, Kaplan and Zingales, Whited and Wu). The former measure has higher replicability, and fit is updated annually by financial institutions, while the latter relies on a specific sample of observations and outdated coefficients. Considering the Italian automotive supply chain and its innovation process between 2017 and 2019, we propose an empirical strategy based on two steps. First, we compare the performance of credit rating scores with an alternative representative measure (i.e. size-age index), to determine the most effective approach. Second, we propose several econometric models to assess whether the proposed measure is robust to alternative hypotheses that might explain difficulty in collecting external financial resources. According to our results, credit rating scores have a higher ability to predict whether firms are under financial constraints than the size-age index. Moreover, the results denote that firms with lower credit rating scores have greater difficulty in collecting external financial resources to fund new R&D projects, as do small firms with previous investments in their production process and innovative products.